The Folly of Futures

Futures are typically for commodities such as lumber, soybeans, and orange juice. They represent contracts between two parties to buy or sell a certain amount for a specified price at a set future date. (Buy some and then neglect to pay attention, and you risk having to take delivery of truckloads of pork bellies!) There are even S&P 500 futures, based on the S&P 500. Each day, the party who bet wrong is obligated to pony up cash based on the price of the S&P 500.

Some investors buy futures when they want to protect themselves against unfavorable price swings. Some speculators buy in when they want to bet on where the market is going. Either way, futures can be very risky. (Of course, they can be quite handy, too -- for example, if you're a cereal manufacturer trying to lock in grain prices.)

Some short-term investors pay a lot of attention to S&P futures, since they can indicate the market's likely moves before trading begins for the day.

We don't fret about futures, though. We care much more about where the market is likely to be years from now than where it will be in 45 minutes.

Look up more money-related terms in our handy online glossary, and learn about some other advanced investing topics in Step 12 of our "13 Steps to Investing Foolishly."

To learn more about investing Foolishly and how the business world works, visit our Fool's School and our Investing Basics area. Or check out some of our inexpensive and well-regarded online how-to guides, which come with money-back guarantees.

You can also learn all about brokerages and find one that's right for you by visiting our Broker Center. Did you know that some well-regarded brokerages are offering commissions for as low as $5?


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