What Are Futures in the Stock Market?
As an active investor, you manage risk and seek opportunity. But what if you could shield your portfolio from a market downturn without liquidating a single position? Or capture upside in a major index without buying a single stock?
That’s the power of futures contracts, or standardized agreements to buy or sell a specific asset at a set price on a future date. They’re more than just trading vehicles; they’re risk management tools you can leverage to offset short-term exposure or tactically position around broad market moves.
Futures 101: What Are Futures in the Stock Market?
A futures contract is a commitment between two parties to exchange an asset at a predetermined price on a specific date. These contracts trade on regulated exchanges and follow uniform terms, which makes them highly liquid and accessible.
Each contract has two sides:
- The Buyer agrees to purchase the asset at that future price. This is called “going long”; they profit if the market moves higher.
- The Seller agrees to deliver or settle the asset at the same price. This is called “going short”; they gain if the market drops.
These contracts are used by investors who want to take a view on the market, hedge risk, or manage exposure without trading individual stocks.
Most futures tied to the stock market are based on major market indexes like the S&P 500 or the Nasdaq 100. These are known as index futures, and they represent a bet on the overall direction of the market, not ownership of any actual stocks. Think of it as trading on the score of the game, rather than on a single player.
Understanding the Risks in Futures Investing
When you trade a futures contract, you’re not paying the full value up front. Instead, you put down a margin deposit: just a small percentage of the total contract size. This setup is called leverage.
Because your small deposit controls a massive contract value, even slight movements in the underlying market lead to magnified changes in your account. For example, a modest 1% move in the S&P 500 index could translate into a 10% or 20% gain (or loss) on the cash you actually deposited.
Due to this intense sensitivity, futures accounts are marked to market daily. That means your gains or losses are realized in cash at the end of each trading session.
If the market moves against you too far, and your losses erode your margin below a certain threshold, you may be required to deposit more funds immediately to keep your position open. This makes risk management critical.
Types of Futures: Commodities vs. Financial Contracts
Futures contracts go beyond just stock indexes. They fall into two broad categories:
- Financial futures, which include index futures, are based on financial benchmarks like interest rates or currencies. These contracts are cash-settled. When the contract expires, the exchange compares the price you locked in to the final market price, and the difference is settled in cash between the buyer and seller.
- Commodity futures are tied to physical goods like oil, corn, or gold. They were originally created to help producers and buyers lock in prices ahead of time. If held until expiration, these contracts can lead to physical delivery, where the actual goods are exchanged.
What Is Futures Investing For?
Whether you’re trying to protect gains, position around economic news, or take advantage of momentum, futures offer tools that are faster and more efficient than moving your entire portfolio.
Protecting What You’ve Built: Hedging With Futures
Hedging is like taking out an insurance policy on your existing assets.
Let’s say you’re holding a well-diversified stock portfolio. You don’t want to sell your positions (you’re invested for the long term), but you’re concerned about a pullback in the next few months.
Instead of selling your stocks, you can temporarily protect their value by selling a futures contract on a major stock index, such as the S&P 500. If the market drops, the value of your futures position rises, helping to offset some of your portfolio’s losses. You stay fully invested, avoid triggering taxes, and still have downside coverage.
Acting on Market Views: Speculating With Directional Trades
Speculation means using futures to take a clear position on where you think the market is headed. Because futures are leveraged, they let you act quickly and efficiently on those views.
For example, if you’re bearish, you can sell a single index futures contract instead of shorting dozens of individual stocks to bet against the broader market. If you’re bullish, you can buy a contract to ride the upside. It’s a streamlined way to express your outlook without having to restructure your entire portfolio.
What Are Futures in Finance and Beyond: Trading Macro Events
Futures allow you to trade more than just stock indexes. You can also use them to take positions on broader economic forces, like interest rates.
Interest rate futures, for example, let you speculate on what the Federal Reserve might do next. If you believe the Fed will raise or cut rates, these contracts allow you to act on that view directly.
Instead of rebalancing your entire portfolio based on rate expectations, you can use a single futures position to reflect that macro view.
Factors To Consider When Trading Futures
Leverage is what makes futures powerful, but it also raises the stakes. A slight shift in the market can have a disproportionately large impact on your account.
In this environment, there’s no room for guesswork or delayed information. To trade futures effectively, you need a constant stream of real-time news, economic data, and expert-level market context.
Whether you’re hedging a portfolio or trading on market direction, success depends on knowing:
- What economic events are driving sentiment right now?
- What key levels are traders watching across major futures contracts?
- How are global developments moving futures markets overnight?
That’s where Briefing.com gives active investors an edge. With institutional-quality coverage, Briefing.com delivers fast, accurate updates on earnings, macro reports, central bank policy, premarket futures price updates, along with futures trading calls.
In the leveraged world of futures, information is your greatest edge.
Start your free 14-day trial of Briefing.com or subscribe now, and get the actionable market intelligence you need to trade with confidence. You can also stay informed after the bell with the After Hours Report and track individual movers through Story Stocks.
