In the previous section, we learned about the derivatives market. A futures contract is an agreement between two parties — a buyer and a seller — wherein the former agrees to purchase from the latter, a fixed number of shares or an index at a specific time in the future for a pre-determined price.
These details are agreed upon when the transaction takes place.
As futures contracts are standardized in terms of expiry dates and contract sizes, they can be freely traded on exchanges. A buyer may not know the identity of the seller and vice versa. Further, every contract is guaranteed and honored by the stock exchange, or more precisely, the clearing house or the clearing corporation of the stock exchange, which is an agency designated to settle trades of investors on the stock exchanges.
Futures contracts are available on different kinds of assets — stocks, indices, commodities, currency pairs and so on.
Here we will look at the two most common futures contracts — stock futures and index futures. Stock futures are derivative contracts that give you the power to buy or sell a set of stocks at a fixed price by a certain date. Once you buy the contract, you are obligated to uphold the terms of the agreement. Here are some more characteristics of futures contracts:.
In the derivatives market, contracts cannot be traded for a single share. Instead, every stock futures contract consists of a fixed lot of the underlying share.
How to trade in Futures
The size of this lot is determined by the exchange on which it is traded on. It differs from stock to stock. For instance, a Reliance Industries Ltd. RIL futures contract has a lot of RIL shares, i.
Similarly, the lot size for Infosys is shares. All three maturities are traded simultaneously on the exchange and expire on the last Thursday of their respective contract months. If the last Thursday of the month is a holiday, they expire on the previous business day.
In this system, as near-month contracts expire, the middle-month 2 month contracts become near-month 1 month contracts and the far-month 3 month contracts become middle-month contracts. Contract is an agreement for a transaction in the future.
How far in the future is decided by the contract duration. Futures contracts are available in durations of 1 month, 2 months and 3 months. These are called near month, middle month and far month, respectively. Once the contracts expire, another contract is introduced for each of the three durations The month in which it expires is called the contract month. New contracts are issued on the day after expiry. If you want to purchase a single July futures contract of ABC Ltd.
Let's say that ABC Ltd July futures are trading at Rs 1, per share. However, it is not necessary that the price of the stock in the cash market on Thursday has to be Rs 1, It could be Rs or Rs 1, or anything else, depending on the how to trade futures contracts in india market conditions. This difference in prices can be taken advantage of to make profits. A stock index is used to measure changes in the prices of a group stocks over a period of time.
It is constructed shetland livestock marketing group selecting stocks of similar companies in terms of an industry or size.
Indian Stock Index Futures Options Trading Investing Stocks Future Option India
Some indices represent a certain segment or the overall market, thus helping track price movements. For instance, the BSE Sensex is comprised of 30 liquid and fundamentally strong companies. Since these stocks are market leaders, any change in the fundamentals of the economy or industries will be reflected in this index through movements in the prices of these stocks on the BSE.
Futures contracts are also available on these indices. This helps traders make money on the performance of the index. Here are some features of index futures: Just like stock futures, these contracts are also dealt in lots. But how is that possible when the index is simply a non-physical number.
No, you do not purchase futures of the stocks belonging to the index. Instead, stock indices points — the value of the index — are converted into rupees. For example, suppose the CNX Nifty value was points.
The exchange stipulates that each point is equivalent to Rs 1then you have to pay times the index value — Rs 6,50, i. This also means each contract has a lot size of Since indices are abstract forex rate in manila concepts, the transaction cannot be settled by actually buying or selling the underlying asset.
Physical settlement is only possible in case of stock futures. Hence, an open position in index futures can be settled by conducting an opposing transaction on or before the day of expiry. As in the case of stock futures, index futures too have three contract series open for trading at any point in time how to trade futures contracts in india the near-month 1 monthmiddle-month 2 months trader stocksbridge far-month 3 months index futures contracts.
Illustration of an index futures contract: If the index stands at points in the cash market today and you decide to purchase one Nifty 50 July future, you would have to purchase it at the price prevailing in the futures market.
This price of one July futures contract london stock exchange ftse 100 companies be anywhere above, below or at Rs 3. Investors and traders try to profit from the opportunity arising from this difference in prices.
The existence and the utility of a futures market benefits a lot of market participants:. However, you must be aware of the risks involved too. The main risk stems from the temptation to speculate excessively due to a high leverage factor, which could amplify losses in the same way as it multiplies profits. Further, as derivative products are slightly more complicated than stocks or tracking an index, lack of knowledge among market participants could lead to losses.
Now that we have read and understood the basics of futures contracts, let us move on to how they are priced. Existing customers can send in their grievances to service. No need to issue cheques by investors while subscribing to IPO.
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