Futures sounds so difficult to grasp. Even though it works with the stock market, it technically is a different market. A lot of people know it better as trading commodities. But it’s actually a lot more than that.
It all started when farmers wanted a good way to price their physical products – or as we know them – Commodities. The prices moved up and down too much so the farmers had no idea what they were going to cost the following year. So a certain price was set with famers and buyers for future contracts.
Basically it means to buy specific commodity on a specific dates for a specific price.
But with years, the markets evolved so that people can buy futures contracts of financial markets, plus crude oil and stock indexes. All with expiring and rollover dates.
When the futures market was created, the contracts were only traded in the pits of major stock exchanges and were only accessible to big money movers since they cost hundreds of thousands of dollars per contract.
Finally the E-mini futures market was created for stock exchanges and some commodities.
E-minis are basically ‘mini’ scale contracts of the larger scale indexes and contracts. They are only traded electronically – E.
This is purely speculative and has no physical product to back it up since they are mainly applied to indexes. What really happens is that traders buy virtual permission to hold the index at a certain value to buy or sell it to someone else. Traders are speculating where the market is going to go.
Here’s the clincher – E-mini futures contracts aren’t real. They are only in existence cause traders say they are and are putting values to them.
What is margin? In the actual stock market it is money you borrow to invest in the market. When you buy a stock (share) of a company money immediately gets taken out of your account and invested into that company. It’s a physical transaction.
Margin happens when you don’t have enough money of your own to buy it and borrow it from your broker.
Futures works completely different. There is nothing tangible to purchase. You are required to have a certain amount of money in your account to trade specific contracts.
If you don’t have enough money in your account, you can’t trade.