The stock market in the United States has been very changeable during the past few years. However, stock futures may be the best to make the most from your investments so that no fluctuation will damage your portfolio.
Considering stock futures as something tangible is the best way to understand how they work. For example, if you own a company that makes French fries, you need to purchase potatoes to make your French fries. The cost of potatoes goes up and down every business day. In order for you to make the most amount of money when you sell your French fries, you want to purchase potatoes for the lowest possible price. However, you understand that the cost of potatoes today may be quite different than it will be in a year. Therefore, you want to purchase potatoes at a fixed price in the future, agree to a futures contract with a farmer to purchase his potatoes for a specific amount on a certain date in the future.
However, the farmer isn't going to agree to a price that is way less than the current market value because he wants to make money also. Therefore, to make sure that both of you will be satisfied with the price of potatoes a year from now, you agree to a fair price. This price won't be the lowest or the highest price, but you and the farmer will be destroyed by drastic fluctuations in the market.
This is much the same way that stock futures work. There are two parties who agree to a contract to purchase or sell a specific amount of goods for a set price in the future. The difference between tangible commodities such as pork bellies, corn, and wheat and stock futures is that contracts for stock future are practically never held to expiration date. These contracts are sold and purchased on the futures market that is based on their relative values.
You can purchase and sell stock index futures or single stock futures contracts in the US based on the performance of an index such as the Standard and Poors 500 or the Dow Jones Industrial Average.
You're not purchasing or selling a stock certificate when you purchase or sell a stock future. You're simply entering into a contract for stock futures which is an agreement to purchase or sell the stock certificate on a particular date at a fixed price. You're not invited to stockholders meeting or entitled to any dividends because you don't actually own any stock which is unlike a conventional stock purchase. With stock futures, you can make a profit even when the market is down. You can only make a profit when the price of your stock goes up with conventional stock market investing.
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