The futures stock market is a financial exchange where people can buy and sell futures contracts. A futures contract is a legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.
Here’s a simplified breakdown of how it works:
- Standardization: Each futures contract is standardized in terms of quantity, quality, and delivery time of the product being traded. This helps traders know exactly what they are buying or selling.
- Hedging and Speculation: Traders in the futures markets are typically divided into hedgers and speculators. Hedgers use futures contracts to stabilize revenue or costs of their business operations. For example, a farmer might use futures to lock in a price for his crop to protect against a drop in prices by the time he harvests. Speculators, on the other hand, are looking to profit from changes in the price of the futures contract. They do not necessarily intend to take delivery of the physical goods but are betting on the price movements of the contracts themselves.
- Margin and Leverage: Futures are traded on margin, meaning that to take a position, a trader only needs to put up a fraction of the value of the contract. This leverage allows traders to gain a larger exposure to the market with a smaller amount of capital. However, leverage also amplifies both gains and losses.
- Mark-to-Market: Futures contracts are marked-to-market daily, meaning the changes in the market value of the contracts are settled daily. If the market moves against a trader’s position, they will be required to post additional margin.
- Clearinghouses and Counterparty Risk: Futures are traded through clearinghouses which guarantee the transactions. This reduces the risk that a counterparty defaults on their obligations.
Traders can close their positions by taking an opposite position on the same contract, which cancels out their initial position, or they can hold their contract to expiration, at which point the contract must be settled by physical delivery of the asset, or cash settlement, depending on the contract specifications.
This market is integral for price discovery and risk management across various sectors, from agriculture to finance.
The futures market, like most major financial markets, typically follows a standard business week schedule. It is generally open for trading five days a week, Monday through Friday. The market is closed on weekends and on major national holidays.
The exact number of trading days can vary slightly from year to year depending on where holidays fall within the week. On average, there are about 252 trading days in a year. This number is based on the 365-day calendar year, minus weekends (which account for 104 days), and does not include public holidays, which can vary by country and market. For example, in the United States, markets are closed for holidays like New Year’s Day, Martin Luther King Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.