Future Gives Better Future
Future Gives Better Future
Last two decades, there has been tremendous growth in trade and industry in all parts of the world. The mobility of factors of production is one reason and the innovative financial products including derivatives are the other reason. The financial instruments played crucial role in development of global economy. Derivatives are different types, stock derivatives, interest rate derivatives, and currency derivatives.
A futures contract is one of the derivative security; and it is an agreement between a seller and a buyer where the seller agrees to deliver to the buyer a predetermined quantity of security, at a price agreed upon at the time contract. A future is actually a type of forward contract with highly standardized and closely specified contract terms. In India, future contracts are trading in BSE and NSE. The under lying uses can be a stock, stock index, bond, interest rate, foreign exchange, commodity etc.
The basics of future transactions
The futures contract calls for delivery of a commodity at a predetermined delivery or maturity date, for an agreed-upon price, called the futures price, to be paid at contract maturity. The trader taking the long position commits to purchasing the stock on the delivery date. The trader who takes the short position commits to delivering the stock or index at contract maturity. The long position of the trader is called as buy a contract, the short position is called as sell a contract. The words buy and sell figurative only, here it is not really bought or sold like a stock or debenture; it entered by mutual agreement of the buyer and seller.
Equity futures are of two types: individual stock futures and stock index futures. Stock index futures are futures on stock market indices such as Nifty or other indices. Individual stock futures are futures on individual stocks. The list of stocks on which futures contracts are permitted may be specified by the exchange or the regulatory body. This usually settled by cash.
Reward of stock futures
There are plenty of advantages in stock futures trading
1. Leverage
By giving margin money, the trader allowed to trade in the future market. Purchasing shares involved in taking delivery of shares by giving the full price to the seller. But in case of future transactions, requires margin money.
2. Diversification
Diversification reduces the business and financial risk of the company. The efficient diversification will maximize the return of the futures contract.
3. Short-selling
Short-selling is the selling futures in the market. It helps to earn superior returns while selling high valued shares.
4. Hedging
Futures used as hedging tools to the hedgers. Hedgers are parties who are exposed to risk because they have a prior position in the stock specified in the futures contract. Hedgers buy or sell futures contracts to protect themselves against the risk of price changes, speculators buy or sell futures contracts in an attempt to earn profit.
5. Low Transaction cost
The transaction cost in the future contract is significantly smaller than what they are in the underlying cash market.
6. Arbitrage
The arbitrageur uses futures contract to exploit price differences between different markets.
Apart from the above, the futures transfer the risk and help to discover the price of the stocks. the volatility in stock market is possible because of derivative trading. The better understanding the futures can improve the futures of the traders.
Last two decades, there has been tremendous growth in trade and industry in all parts of the world. The mobility of factors of production is one reason and the innovative financial products including derivatives are the other reason. The financial instruments played crucial role in development of global economy. Derivatives are different types, stock derivatives, interest rate derivatives, and currency derivatives.
A futures contract is one of the derivative security; and it is an agreement between a seller and a buyer where the seller agrees to deliver to the buyer a predetermined quantity of security, at a price agreed upon at the time contract. A future is actually a type of forward contract with highly standardized and closely specified contract terms. In India, future contracts are trading in BSE and NSE. The under lying uses can be a stock, stock index, bond, interest rate, foreign exchange, commodity etc.
The basics of future transactions
The futures contract calls for delivery of a commodity at a predetermined delivery or maturity date, for an agreed-upon price, called the futures price, to be paid at contract maturity. The trader taking the long position commits to purchasing the stock on the delivery date. The trader who takes the short position commits to delivering the stock or index at contract maturity. The long position of the trader is called as buy a contract, the short position is called as sell a contract. The words buy and sell figurative only, here it is not really bought or sold like a stock or debenture; it entered by mutual agreement of the buyer and seller.
Equity futures are of two types: individual stock futures and stock index futures. Stock index futures are futures on stock market indices such as Nifty or other indices. Individual stock futures are futures on individual stocks. The list of stocks on which futures contracts are permitted may be specified by the exchange or the regulatory body. This usually settled by cash.
Reward of stock futures
There are plenty of advantages in stock futures trading
1. Leverage
By giving margin money, the trader allowed to trade in the future market. Purchasing shares involved in taking delivery of shares by giving the full price to the seller. But in case of future transactions, requires margin money.
2. Diversification
Diversification reduces the business and financial risk of the company. The efficient diversification will maximize the return of the futures contract.
3. Short-selling
Short-selling is the selling futures in the market. It helps to earn superior returns while selling high valued shares.
4. Hedging
Futures used as hedging tools to the hedgers. Hedgers are parties who are exposed to risk because they have a prior position in the stock specified in the futures contract. Hedgers buy or sell futures contracts to protect themselves against the risk of price changes, speculators buy or sell futures contracts in an attempt to earn profit.
5. Low Transaction cost
The transaction cost in the future contract is significantly smaller than what they are in the underlying cash market.
6. Arbitrage
The arbitrageur uses futures contract to exploit price differences between different markets.
Apart from the above, the futures transfer the risk and help to discover the price of the stocks. the volatility in stock market is possible because of derivative trading. The better understanding the futures can improve the futures of the traders.
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