Go through the BS and put common expressions of personal finance in plain language.
Future stock prices are unknown, unless you are Phil from the future or trade futures contracts.
Futures contracts, or futures, are agreements to trade a commodity (like oil) or a security (like a stock) at a later date, but at today’s price. Retail investors rarely trade futures contracts because it requires huge speculation and presents a large potential for loss. Although with a bitcoin futures ETF on the scene, I predict an increase in consumer interest.
Here’s how futures contracts work: Let’s say I own a square of pumpkins. I have the best gourds for miles. Because I love chaos, I change my prices daily based on demand.
- You want to come get some gourds on Saturday, but you think the price of a 5-pack is going to be way over the $ 15 I’m charging today. You are optimistic about the gourds.
- I’m just worried about getting rid of my inventory by the end of the season, so I agree to sign a futures contract over the phone. The contract says you will buy five gourdes at $ 15 and collect them on Saturday. You pay me $ 1.50 today, what investors call a initial margin.
- Regardless of the price on Saturday, you are forced to buy the gourds at $ 15. (It’s different from a option, that is, when you are given the right, but not the obligation, to make a trade.)
The story can go two ways from here. You can 1) play hot potato by selling the contract to another party before the contract expires or 2) pick up (and pay for) the gourds yourself on Saturday.
- You decide on Thursday that gourds no longer fit your design aesthetic, but you know some of your neighbors don’t care. You call them up and offer to sell the contract for $ 5. You made $ 3.50 on the deal, and now it’s your neighbors’ job to pick up the gourds on Saturday and pay the $ 13.50.
- You load the gourds into your safe on Saturday and pay me the $ 13.50 you owe. Deal concluded. It’s a bummer, however, as the gourds were selling for just $ 10 that day.
Often the goal is to sell the contract for a gain and never take delivery of the underlying product. Investment firms do it all the time with oil. (Just imagine a stock analyst in Patagonia with barrels of oil on his doorstep.)
As I said earlier, futures trading is a risky business, and most ordinary investors like you and I don’t have the time to do sophisticated analysis and make informed decisions. You’d better stick with other more stable assets like index funds.