Pre-market futures trade before the regular investment markets open. Different market exchanges specialize in the trade of specific types of futures. For example, the Commodity Exchange in New York specializes in pre-market futures of copper, gold, and silver. Other well-known futures market exchanges include the New York Futures Exchange, the New York Mercantile Exchange, and the Chicago Mercantile Exchange.
Pre-market futures are contracts to buy or sell investments at a certain price on a certain date. The sell or buy date is always in the future. For instance, a buyer makes an agreement with a seller to buy 10 shares of stock at $20 each two weeks from today. The buyer must pay the agreed upon price, regardless of what the stock's actual price is two weeks out.
The agreed-upon contract price reflects what buyers and sellers expect the future market price to be. Traders base their expectations on the activity of major market exchanges, such as the Dow Jones Industrial Average. The buyer benefits when the agreed-upon futures price is less than the actual trading price. A seller benefits when the agreed-upon futures price is more than the actual trading price.
Some investors and analysts use pre-market futures to predict how a stock will perform once the market opens. The stock index future price, which is the pre-market futures average, reflects what price the stock might open at. The stock index future price does not always correlate with the stock's actual opening price. At times the opening price might vary drastically from the index future price. In addition, the stock's price might go up and down before the market closes. The stock index future price is not a guarantee of the stock's daily performance.
Fair value is the relationship between the price of pre-market futures and the actual price of the stocks. The difference between the prices are at "fair value" when there isn't an advantage on either side. In other words, there isn't an advantage to buying or selling the futures vs. the actual stocks on the future date. Buyers and sellers tend to make trades on the pre-market futures exchanges when the price differences are not at "fair value."
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