What is Stock Futures?

What Are Stock Futures?

Stock futures are margin-based contracts that commit buyers and sellers to trade stocks or stock indices at a predetermined price on a specified future date. These instruments enable traders to take both long and short positions and offer exposure to larger notional values with relatively small upfront capital.

In most markets, stock futures are divided into index-based contracts and single-stock contracts. Each contract specifies its expiration month, contract multiplier (the monetary value per index point), minimum price movement, and settlement method (either cash or physical delivery). Traders only need to pay a margin rather than the full contract value, and profits or losses are settled daily.

How Do Stock Futures Work?

Stock futures operate through a combination of margin requirements, daily mark-to-market settlement, and final settlement at expiration. Their prices fluctuate based on the underlying asset, interest rates, and expected dividends.

The margin acts as a security deposit, allowing traders to open positions by locking up only a fraction of the contract's value. Daily settlement means that profits and losses are credited or debited to the account based on the day's closing price; losses consume margin while gains release it. Upon expiration, contracts are settled either by cash (netting the price difference) or by physical delivery (actual transfer of stocks according to exchange rules).

A simple example: Suppose a stock future is priced at 100, with a contract multiplier of 100, making the notional value 10,000. With an initial margin requirement of 10%, you can go long by posting 1,000 in margin. If the price rises to 101 in a day, your account is credited with 100 × 1 = 100 in profit; if it falls to 99, you incur a 100 loss, possibly triggering a margin call.

What Are the Use Cases for Stock Futures?

Common use cases for stock futures include hedging, speculation, and arbitrage. Hedging helps reduce price volatility of spot holdings, speculation enables traders to profit from directional moves or volatility, and arbitrage exploits price discrepancies between futures and spot markets or different contract months.

For example, in hedging: If you hold a stock portfolio worth 100,000 and worry about short-term declines, you could sell an equivalent amount of stock futures to go short. If the market drops, losses on your spot holdings are offset by gains from your short futures positions, stabilizing your net asset value.

In speculation: Go long if bullish by buying futures; go short if bearish by selling them. Leverage amplifies account changes even with minor price movements.

For arbitrage: When futures prices diverge significantly from spot prices beyond trading costs and risk thresholds, professional traders may construct low-risk strategies by simultaneously buying spot and selling futures (or vice versa), waiting for prices to converge.

What Are Margin and Leverage in Stock Futures?

Margin is the deposit required to open futures positions—typically a fraction of the notional contract value. Leverage allows traders to control larger positions with smaller amounts of capital, magnifying both gains and losses.

Maintenance margin is the minimum required balance to keep positions open. Falling below this level triggers a margin call; failure to meet it may result in forced liquidation (automatic closing of positions to prevent further losses).

Numerical example: For a contract worth 10,000 with a 10% initial margin (1,000), leverage is about 10x. A 2% price drop causes a 200 loss—20% of the margin. If losses exceed the margin and stop-losses aren’t used, liquidation can occur rapidly.

How Do Stock Futures Prices Relate to Spot Prices?

Stock futures prices generally fluctuate around “spot price + carrying cost − expected dividends.” As expiration approaches, futures prices converge with spot prices. Carrying cost represents interest and other expenses associated with holding capital until maturity; expected dividends reflect the impact of anticipated payouts before expiration.

High interest rates and low dividend expectations can drive futures above spot prices; high dividend forecasts or other factors can cause futures to trade below spot. The difference between them is called “basis,” which typically narrows as expiration nears.

In practice, significant dividend payments, refinancing events, or index rebalancing can temporarily alter carrying costs and expectations, impacting relative pricing between futures and spot.

How Do You Open and Close Positions in Stock Futures?

Opening a position means initiating long or short exposure; closing a position means executing an offsetting trade to realize profits or losses.

Step 1: Select a contract. Determine the underlying asset (single stock or index), expiration month, and contract multiplier; understand minimum tick size and trading hours.

Step 2: Set your margin mode. Confirm initial and maintenance margin levels; choose between isolated margin (risk per position) or cross margin (risk across the whole account).

Step 3: Place an order. Go long if bullish, go short if bearish; use market orders (immediate execution) or limit orders (set price) as needed.

Step 4: Manage risk. Set stop-loss and take-profit levels; monitor daily settlements affecting your margin balance; adjust positions or add margin if required.

Step 5: Close positions or settle at expiration. Most traders close out before expiry; holding until expiration means settling according to exchange rules via cash or physical delivery.

What Are the Risks of Trading Stock Futures?

Key risks in stock futures trading include leverage risk, liquidity risk, basis risk, and regulatory/systemic risks.

Leverage risk: Small price moves can cause large capital changes; lack of stop-losses can amplify losses.

Liquidity risk: When contracts are thinly traded, bid-ask spreads widen and slippage becomes more severe.

Basis risk: Hedging may be less effective if your spot portfolio does not precisely match the futures’ underlying asset.

Regulatory/systemic risk: Changes in trading hours, margin requirements, settlement methods, or other rules can impact your strategy’s effectiveness.

All trading involving capital carries risk—manage position sizes carefully, use stop-losses, and fully understand contract terms and market conditions before trading.

How Do Stock Futures Compare With Crypto Derivatives Trading?

Crypto derivatives trading shares key mechanics with stock futures—margin requirements, long/short capability, and daily settlement logic—but is based on crypto assets with different settlement and pricing mechanisms.

On Gate’s derivatives platform, USDT-margined perpetual contracts use funding rates to keep contract prices in line with spot markets—a concept similar to “carrying cost” in stock futures. Traders participate via margin accounts, can go long or short, use isolated or cross margin modes, and must set stop-losses for risk control. Beginners will find it easier to master crypto derivatives after understanding the basic logic of traditional futures trading.

Key Takeaways on Stock Futures

Stock futures are margin-based contracts linked to stocks or indices. Their core features include daily settlement, leverage, and expiration delivery; they are used for hedging, speculation, and arbitrage. Pricing fluctuates around spot plus carrying cost minus expected dividends—and converges with spot as expiration nears. In practice: select your contract and margin mode first, then place orders and manage risk; finally close positions before expiration or settle as per exchange rules. Because leverage amplifies both gains and losses, always control position size, set clear stop-losses, and thoroughly understand contract terms and market risks before trading.

FAQ

What Is the Biggest Difference Between Stock Futures and Spot Stocks?

The main difference is timing of settlement. Spot stocks give you immediate ownership upon purchase; futures are agreements to settle at a future date—enabling you to control larger amounts of stock for less capital (via margin). For example: buying 1 million worth of spot stocks requires full payment; purchasing an equivalent amount of futures contracts may only require 100–200 thousand in margin—this is how leverage works.

What Happens When a Futures Contract Expires? Must I Settle?

Futures contracts have fixed expiration dates. Before expiry you can close your position (sell your contract) to exit; or hold until settlement day for cash settlement (most financial futures settle in cash rather than physical delivery). If you still hold a position on the last trading day, exchanges will enforce mandatory settlement—so always watch contract expiry dates closely.

I Made $100 Profit on Futures—But Can Losses Exceed My Margin Deposit?

Absolutely. Because futures use leverage, losses can far exceed your initial margin deposit. If the market moves sharply against your position, your account may quickly blow up (forced liquidation). For example: posting 10 thousand in margin to control a 100 thousand contract—if you lose 5%, that's $5 thousand lost; you could lose all your margin and end up owing more. That’s why futures are high-risk—returns may multiply quickly but losses can also lead to bankruptcy just as fast.

Who Should Trade Stock Futures?

Stock futures are best suited for experienced investors who can tolerate high risk. If you’re new to trading or have limited funds or low risk tolerance, start with spot stocks instead. Futures are ideal for intermediate or advanced traders seeking short-term profits from price swings—and who understand risk management using stop-loss strategies.

Why Are Futures Prices Different From Spot Stock Prices?

Futures represent expectations of future prices; spot is today’s actual trading price—the difference between them is called “basis.” Futures prices usually trade slightly above spot (due to time/carrying costs), but this gap narrows as expiration approaches. If futures premium becomes excessive, arbitrageurs buy spot stocks while selling futures—this arbitrage compresses the difference until prices converge at settlement.