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If you’re thinking of diving deeper into the stock market’s murky waters, it’s a good idea to know a little bit about futures. If you want to know more about what a future is, how it works and where you can get skilled up on how to use them, read on.
What are futures?
A short definition of a “future” is “a financial contract that obligates the buyer to purchase an asset (or indeed the seller to sell an asset) at a future date and price”. It can be held over a whole range of areas, such as a physical commodity or a financial instrument, bonds and equities. The futures contract will detail the quality and quantity of the underlying asset in question.
Why do people use futures and how do futures work?
Futures can be used either to hedge or to speculate on the price movement of the underlying asset. So a wheat producer, for example, could utilise futures to fix a certain price, thus reducing the amount of risk (hedge) in question.
Futures markets are characterized by the ability to utilise high leverage relative to stock markets. Unlike options, where the holder can choose whether to sell the underlying assets or index at expiration, the holder of the futures contract must stick to the contract. When the contract reaches maturity, a cash settlement takes place. Delivering the underlying goods in the contract is very unusual, as hedging or speculating the benefits of the contract can be done without actually holding it until expiry.
Whether you make a profit or loss is entirely dependent on how the index in question has faired in the timeframe since the contract was traded.
Futures and the ASX
Futures contracts are traded over three share market indices at the ASX: the S&P/ASX50 Index, the S&P/ASX200 Index and the S&P/ASX 200 Property Trusts Index. For more information on how to get involved with futures, take a peek at the website of the Australian Stock Exchange or speak with your broker or financial planner.
