Stock futures are 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 compelled to uphold the terms of the agreement. For example: if trader wants to purchase a single march futures contract of some company he/she would have to do so at the price at which the march futures contracts are currently available in the derivatives market. Let us assume that company’s March futures are trading at Rs 100 per share. This interprets that the trader is agreeing to buy/sell at a fixed price of Rs 100 per share on the last Wednesday in March. However, it is not at all compulsory that the price of the stock in the cash market on Wednesday has to be Rs 100. It could be Rs 92 or Rs 105 or anything else, depending on the prevailing market conditions. This difference in prices can be taken advantage of, to make profits.
There are three basic characteristics of stock Future:
(2)Contract Size and
Duration: Contract is an agreement for a transaction in the future. How far in the future is decided by the contract duration. Contract duration can be of 1month, 2month, and 3 month. These are called near month, middle month and far month respectively. The month in which the contract expires is called the contract month. The contract can be renewed on date one after the expiry date, as soon as it expires.
Contract size: Contracts cannot be traded for a single share. Instead, every stock futures contract consists of a fixed lot of the underlying share. The size of this lot is determined by the exchange on which it is traded on. It differs from stock to stock.
Expiry: In this system, as near-month contracts expire, the middle-month (2 months) contracts become near-month (1 month) contracts and the far-month (3 months) contracts become middle-month contracts.
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