Thursday, June 30, 2016

Wall Street Futures Contracts

Gambling? Or shrewd investment?  The Wall St futures market is big enough for NPR to report on it.  Like Friday, when the Brexit vote was counted and announced, NPR said that Wall St futures had dropped a lot before the market opened.  At any rate, a good deal of money is invested in "futures".  Does this money do anything to encourage economic growth, employment, new product development, in short, good things for America as a whole, or just some profits to lucky gamblers?
   I have never dealt in futures, and a quick Google  didn't say just how stock market futures work.  Let's assume they work like commodity futures.  Two parties reach a deal, sign a contract, to deliver so much of something, or buy so much of something,  for such and such a price, on a date in the future.  If the market price of what-ever-it-is changes before the due date, one party makes money, and the other party does not.
   Does this kind of deal make sense for the larger economy?  Hard to tell.  Certainly the money spent on futures contracts does not go to a company in return for stock.  Companies print and sell their stock, for cash, to obtain money to run the company, grow the company, pay the workers, lots of things that create jobs.  And the stock market makes people willing to buy stock.  With an organized stock market, open for business five days a week, a stock holder knows he can sell his stock holdings when he needs some cash.  And the trade will go thru, and he gets a check, within a day or two.  This is a goodness, it gives companies a fine way to raise money.
   But I don't see how a stock futures contract does anything good for the economy.  It surely doesn't funnel money to companies.  I don't see it increasing market liquidity.  I think it's just plain gambling, of no benefit to anyone except lucky winners.
   I'm not an economist, I'm just a plain engineer.  I've never read anything about the economic effect of futures trading.  I wonder what the economics community thinks about them.  

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