Investing in stock futures is an excellent method to hedge your investments so that market fluctuations don't lead to major financial losses. You won't be immune to market ups and downs, but you will be shielded to some extent. That said, investing in stock futures is risky business. Take the time to learn all about it with our very informative quiz.
A contract to trade a specified amount of stock at a specified price on a specified future date is called:
Stock futures work like this: Two parties enter into a contract to buy or sell a specified amount of stock for a specified price on a specified future date in an attempt to shield themselves from wild fluctuations in the stock market.
When you buy stocks that are traded on the stock exchange, you earn money when the price of your stock:
When you invest in traditional stocks, you only make money when the price of your stock goes up. In the case of stock market futures, you can make money even when the market goes down.
When you own stock in a corporation, you can earn _____ on a regular basis.
Dividends are paid to stockholders on a fixed schedule and stockholders are entitled to attend stockholder's meetings. When you invest in stock futures, you are not a stockholder.
The basic positions on stock futures are called:
The two positions on stock futures mirror each other. The long position agrees to buy the stock when the contract expires, whereas the short position agrees to sell the stock when the contract expires.
Who might issue a margin call?
If the value of your investment falls below the agreed upon maintenance level, your stockbroker may issue a margin call, requiring you to pay him extra money in order to bring the value of your futures contract back up to the maintenance level.
The idea behind _____ is to protect yourself against market downturns by taking opposite positions on the same investment.
To protect yourself against market downturns, you can take opposite positions on the same investment in stock futures.
A _____ is when you go both short and long on the same stock future with two different delivery dates.
With a calendar spread you can go both short and long on the same stock future with two different delivery dates. In one example, you might agree to sell 100 shares after a month and in the other, you agree to buy 100 shares after six months, thereby making money on both short-term losses and long-term gains.
An_____ involves going long and short on two different stock futures in related markets.
When you go short and long on two different futures in related markets, you count on one stock future's loss being the other's gain.
A _____ is when you enter a futures contract to buy shares in two competing companies.
If you buy futures contracts in competing companies like Microsoft and Apple, you hope that one stock future will outperform the other, but not in such a way that they cancel each other out.
When you _____ a stock, you use a small amount of money to buy a large amount of stock.
Starting out with the same amount of money, you can buy many more futures contracts than actual stock shares. This ability to buy stock futures by leveraging -- also called buying on margin -- is what makes them such a popular investment.
When you buy traditional stocks on margin, you use your _____ as collateral for the loan.
When you buy traditional stocks on margin, you are basically borrowing money from your stockbroker and using the stocks themselves as collateral for the loan.
Since your basically borrowing money to invest in stock futures when buying on margin, you run the risk of:
Investing in stock futures can be very risky business. If something goes wrong, you can end up not only losing your initial investment, but owing more money, as well.
Which United States law reintroduced the trading of single stock futures?
Between 1982 and 2000, the trading of single stock futures was banned in the United States. The Commodity Futures Modernization Act of 2000 reintroduced such trading to the commodities marketplace.
Individual investors in single stock futures are known as:
Single stock futures are traded on the OneChicago exchange. Individual investors are called day traders and they use online brokerage services to trade stock futures
What do we call a large group of investors who pool their money in the same portfolio?
To reduce your investment risk, you might prefer to invest in a commodity pool -- a large group of investors who pool their money to buy stock futures. A major advantage is that a commodity pool is managed by an expert team of brokers.
About HowStuffWorks Play
How much do you know about dinosaurs? What is an octane rating? And how do you use a proper noun? Lucky for you, HowStuffWorks Play is here to help. Our award-winning website offers reliable, easy-to-understand explanations about how the world works. From fun quizzes that bring joy to your day, to compelling photography and fascinating lists, HowStuffWorks Play offers something for everyone. Sometimes we explain how stuff works, other times, we ask you, but we’re always exploring in the name of fun! Because learning is fun, so stick with us!