All about futures

setvenbob1 — Mon, 18 Oct 2010 06:29:35 +0000

Buying a stock makes you part owner of a company. When you buy a futures contract you don’t own anything, but enter into a binding contract for a future purchase of merchandise, be it a carload of wheat or a sheaf of Treasury bonds. The person who sells you that contract assumes the obligation to deliver. The money you pay for a stock goes to the seller, but in futures you margin money stays with the broker as a security, ensuring you will accept delivery when your contract comes due. They used to call margin money honest money. While in stocks you pay interest for margin borrowing, in futures you can collect interest on your margin.

Each futures contract has a settlement date, with different dates selling for different prices. Some professionals analyze their differences to predict reversal. Most futures traders do not wait and close out their contract early, settling profits and losses in cash. Still, the existence of a delivery date forces people to act, providing a useful reality check. A person may sit on a losing stock for ten years, deluding himself it is only a paper loss. In futures, reality, in the form of the settlement date, always intrudes on a daydreamer.

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All about futures