What is Future Trading?

1. What are Stock Futures?

Stock Futures are financial contracts where the underlying asset is an individual stock. Stock Future contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller. The contracts have standardized specifications like a market lot, expiry day and unit of price quotation, tick size and method of settlement.

2. How are Stock Futures priced?

The theoretical price of a futures contract is the sum of the current spot price and the cost of carrying. However, the actual price of futures contract very much depends upon the demand and supply of the underlying stock. Generally, the futures prices are higher than the spot prices of the underlying stocks.

Futures Price = Spot Price + Cost of carrying

The cost of carrying is the interest cost of a similar position in the cash market and carried to the maturity of the futures contract less any dividend expected until the expiry of the contract.

4. What are the opportunities offered by Stock Futures?

Stock futures offer a variety of usages to the investors. Some of the key usages are mentioned below:

· Investors can take long term view on the underlying stock using stock futures.

· Stock futures offer the high leverage. This means that one can take a large position with less capital. For example, paying a 20% initial margin one can take a position for 100 i.e. 5 times the cash outflow.

· Futures may look overpriced or underpriced compared to the spot and can offer opportunities to arbitrage or earn a risk-less profit. Single stock futures offer arbitrage opportunities between stock futures and the underlying cash market. It also provides arbitrage opportunities between synthetic futures (created through options) and single stock futures.

· When used efficiently, single-stock futures can be an effective risk management tool. For instance, an investor with a position in the cash segment can minimize either market risk or price risk of the underlying stock by taking a reverse position in an appropriate futures contract.

5. As an investor, how do I start trading in Stock Futures?

You need to first register yourself as a client with a Registered Broker by fulfilling all the KYC or Know Your Client rules. Then, sign up the client agreement form and risk disclosure document provided to you by your broker.

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