What is future & option in stock market?

Question

What is future & option in stock market?

Answer 1

Futures and Options are advanced topics in the stock market. Get a basic book on stocks. I like the book called All about stocks.   You should educate yourself on more basic topics first, like stock value, the PE ratio and how to research companies before doing anything in futures and options.  Too risky for me.

Answer 2

Here's a very generic definition that might help you.

Future refers normally to a contract where the parties involved agreed to "lock" a price, generally as a form of strategy. Let's say, your business is highly dependent with "oil," so for you to ensure that you will have some form of guarantee with the price of oil, you would want to enter into a future contract -- meaning that regardless of what happens with the price of oil either skyrocketed or not, you're cost of buying remains the same.

Option is highly similar with a future contract. The major difference is from the word itself - optional. With the future contract, you normally buy a "contract" to lock the price of a certain item and you are required to execute the provisions of the agreement, otherwise, you will incur some penalty or damage cost. With the option contract, you normally enter into an optional contract to buy or enter into a future contract, but instead of paying the future contract, you normally pay like a reservation fee (minimal amount) to secure your option. Thus, you can either opt to exercise or withdraw from the option contract of entering into a future contract depending on the circumstances at the point of time - whether it will be beneficial or not. In short, "option" is an optional method of entering into a future contract.

Again, this totally furnish a generic understanding but note that there are other complexities that need to be considered such as the availability of a counterparty, valuation issue and other matters.