what is future trading?
Future trading is a revolutionary system that brought many changes in the world of stock market. Before proceeding further, let me put some questions…
What would you do even if you know markets will fall in next 1 month of time if there is no derivative trading.
Yes, as cash trading does not permit short trading for more than 1 day, traders have to rely on derivative trading for some reasons.
As the name itself contains a word “Derive”, it tell us the definition, “security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset”. Derivative trading is classified into future trading, option trading, forward contract, swaps etc.
Let us put this in a simpler way, on January 1st, a person ‘M’ comes to a contact with shopkeeper ‘N’ that he want delivery of 1 book on January 27th at the same current market price, say Rs.10, which is running on the contract day, January 1st (person ‘M’ has to pay the agreed amount at the time of contract i.e., January 1st to ‘N’).
On January 27th if the market price of the book is above 10, say Rs.13, the person ‘M’ will be in the profit as he already went into contract and paid at a price (Rs.10) less than the price on January 27th (Rs.13). As well, if the price on January 27th is less than Rs.10, say Rs.7 its obvious to say the the shopkeeper ‘N’ will be in profit as he sold the book for a price (Rs.10) greater than current price of January 27th (Rs.7).
Here, the person ‘M’ is in a view that market price of the book might raise till January 27th and so he paid an amount of rs.10 in advance the shopkeeper ‘N’ is in a view that book price might fall till January 27th and agreed to take a sum of Rs.10 in advance as per the contract.
In the above example, January 27th is the final date of contract which is called as “EXPIRY” that would be the last Thursday of the month. If buyer or seller failed to square off on the last day of the contract, it will be done automatically by the exchange. In general, three expiries are available in Indian stock market, where traders can come into a contract with 3rd month and hold the stock for 90 days.
The most important feature of future trading is that, it allows to short the markets for the same period of contract time where you become a seller with a view that markets might fall in the near future. There is no need for the traders who are in short to square off their positions in intraday.
Apart, there are also other important advantages like hedging and arbitrage which are explained in our next posts. Future trading is also available in nifty. Traders can make use of Nifty future trading to make their portfolios safe by hedging concepts.
Summary for Future trading:
Future trading allows to go long (buy and sell) and short (sell and buy back) trades.
Time frame to hold the stock will be till the last thursday of the month.
Derivative trading discounts the price for every lot.
Contracts can be exercised anytime till expiry.
Future trading is available in nifty and stocks.
Used to trade in combination with other segments like cash to hedge.
Profit and losses in future trading are high when compared with cash trading.
Posted on: 2016-06-07 16:37:46 Updated on: 2016-06-07 16:37:46