A close friend of mine who had worked as a stock broker retired last month at the ripe old age of 42. He made all of his money in stock futures and now he spent his summers in Miami Beach, his winters in Aspen, and the rest of the time on the golf course of the best country clubs in the county. While I was happy that my friend had found such success, part of me (perhaps a large part) couldn’t help but feel envious. This was a man I’d gone to high school with and who had only attended junior college. At the same time he was amassing his millions, I was busy attending Princeton and then medical school before finally becoming the town doctor. All day long I did treat kids with fevers, check tonsils or administer physicals, while my friend drinks long island ice teas and rides around in golf carts.
Then one day I asked him to explain stock futures to me. I told him I loved my job, but that I didn’t want to spend the rest of my life giving flu shots to crying children and old people. Though I had made it through medical on time and near the top of my class, it certainly wasn’t easy to understand stock futures.
My friend went on to explain that stock futures or futures contracts are nothing more than an agreement to buy or sell a particular commodity sometime in the near future at a price that is agreed upon by the buy or seller. When I heard this, I just shook my head and said, “Excuse me?” He smiled and explained that stock futures were hard for everyone to understand in the beginning, but after sometime they made a lot of sense. He gave me an example.
“Say there’s this stock I think is going to go up in the future, but I don’t have the money to buy it outright.” I nodded my head that I was following along. “Well,” he said, “I might decide to buy a future from a seller who believes that the price of the stock is going to go down in the future.” He continued. “Then when the future month rolls around, if the price is higher than it was when I bought it, the seller has to make up the difference. However, if the price is lower, I have to make up the difference and I end up losing quite a bit of money.”
I told him I understood what he was saying, but I still didn’t get how he made so much money doing it.
“Well,” he said, “I’m half gypsy on my mother’s side. All I have to do is look into her old crystal ball and I know exactly which stock futures to buy. It’s just that simple.”
We both laughed at this and that ended my tutorial on stock futures. Though I never did end up trading stock futures, I was always curious. But I am a cautious man but nature and am severely allergic to risk. Besides, being a town doctor isn’t such a bad gig.
