Question

Has the Futures Market Created More Uncertainty for Stocks? Offer your own opinion on this issue. please elaborate.  

Answer 1

Futures are basically an agreement between the future buyer and seller to provide the underlying asset i.e. either stock or commodity at a later date. The price for the same is locked at the futures rate for that particular security called the futures price of the stock.

The problem with this kind of a Futures market is that it is becomes a forecasting game for the stock prices. This is because one does not know what the exact price of the stock will be at a later date. All one knows is the current price. Markets open and close taking an indication from the futures price of the stock and the underlying demand for the stock. This becomes supply demand dynamics than fundamental dynamics on which ideally a stock price of a company should be based.

While futures market can be of use in case of commodities because commodities are ultimately driven by supply and demand, stock prices cannot be. Commodities like Crude Oil etc are being trade in futures market and the contango and backwardation phenomenon does act on the commodities. However it is mistaken to perceive the stock prices in the same way. This is because then we are taking a very narrow view of the company through its stock price and it is highly speculative. Rather stock prices should be viewed from a long term perspective and through the companies' fundamentals rather than any other parameter.

Thus all in all futures market has definitely created a uncertainty for stocks as no one can predict the behavior of stock prices which also change due to a lot of news events and are exposed to lot of industry dynamics, company dynamics, macro and micro factors.