What is the Futures Market?
The futures market first began when farmers needed a reliable way of pricing their products, better known as commodities. Due to fluctuations in prices, they didn’t know how much they were going to make year after year and the futures market was born as an agreement between farmers and buyers to buy that commodity at a certain price in the future.
The definition of a futures contract is to buy a specific commodity, on a certain date, in the future for a specific price. As financial markets evolved, futures contracts were applied to the financial markets and futures contracts were created for crude oil and stock indexes like the S&P 500 & the Nasdaq.
What are E-mini Futures
In the beginning, only full sized futures contracts were available to be traded in the pits of the major stock exchanges. At that time, futures contracts were worth hundreds of thousands of dollars and only big money players could afford to get involved. Over time, the E-mini futures market was created. It was applied strictly to stock exchanges and a handful of commodities (like crude oil for example).
E-mini futures are, essentially, the “mini” version of the classic large scale contracts. E-mini contracts are only traded electronically, hence the “E” in E-mini. They allow traders to buy a contract that places a value, or a price, on that particular commodity or index. When you purchase a contract at a certain price, the value of the index or your contract, will appreciate or devaluate, depending on your position.
Most E-mini contracts are only applied to indexes, this means you are not buying a physical object. We aren’t buying anything tangible. We are simply buying virtual permission to hold the value of a certain index in order to sell it to someone else at a different price…. ideally with a profit.
This is where the word speculator comes in. We are speculating where the market is going using a system of rules and patterns. It is speculating because an E-mini futures contract isn’t real, it only exists because you and I say it exists and put a value on it.
Brokerage Accounts
If you needed to write a check, you would need a bank with a checking account. So, if you were to trade the markets, you need a brokerage account to invest in the stock market. While we are sure you’ve heard of some big names like Merril Lynch, TD Ameritrade or Scottrade, there is no reason to bother using any of the big names. There are specific brokerage companies that tailor to futures traders. They give futures traders better pricing and excellent support on software platforms that are used specifically to trade futures market.
Margins
In the stock market, the word margin is used to describe the amount of money that you borrow to invest in the stock market. This is because when you buy stock there is money physically transferred out of your account since you are buying something tangible, a piece of paper (share of stock) that says you own a piece of the company you are buying.
In the futures market, a margin is the amount of money required in your account to day trade a specific futures contract. When you buy a futures contract there is no money being transferred from your account to purchase the E-mini contract (remember there is nothing tangible being bought). Brokers have margin requirements in order to ensure that you will have enough money in your account to trade that specific contract.
Short Selling
In the futures market you are able to make money when the market goes down and when it goes up. It’s a foreign concept to most people but it’s quite easy to understand. Let’s say you have a car you want to sell and you’re not able to get the $50,000 that you want for the car. I happen to have a friend that knows that is willing to buy the car for $40,000, something you are willing to do but just can’t find the buyer. You “lend” me the car to sell it to my friend and you give me the $10,000 difference as a finder’s fee.
This is short selling. You borrow the futures contract (the car) from your broker in order to sell it at a lower price and you make a profit.
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