A stock future describes a contract that is drawn to sell a particular amount of a stock for a defined price on a set date in the future. The stock market in the U.S. is particularly known for its volatility. That’s where the stock future comes into play and helps in saving your portfolio from getting ruined by any possible market fluctuations that can happen.

The best possible way to understand the concept of stock future and how they work would be to consider it as something you can control. For instance, say you own a cotton textile industry. It is obvious that the price of cotton would keep fluctuating from one day to another. But in your best interest, in order to make the maximum profit you will need to buy the cotton at the least price possible so that you can earn the maximum profit on the finished product. However, the farmer who would sell the cotton to you would also not agree to sell it below the market value. So, both of you agree on a fair price which definitely won’t be below the market value but also won’t be anywhere closer to the highest price possible, and then enter into a futures contract.

One of the differences between the stock futures and the tangible commodities like wheat, corn, cotton etc. would be that a stock futures contract is almost never held till the absolute expiration date. These contracts are bought and sold on the futures market on the basis of their relative value.