Different Types of Futures Contract| Espresso

Explain Different Types Of Futures

Futures are used in the different stock markets to guard against price volatility. For investors who wish to take advantage of the price volatilities in the market, investing in stock futures can be the best solution. A futures contract provides a buyer or a seller with the right to buy or sell an asset at a specified future price.

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There are several types of futures in the commodity and financial segments. Some of these consist of stocks, indexes, interests, and currency futures. In addition, commodity futures like agricultural goods, oil, gold, oilseed, cotton, etc., are also present. Let’s get into the details of different types of futures in the share markets.

Also Read: Agri Commodity Trading

Understanding Futures – What Are They?

Futures are also called futures contracts. These allow investors and stock market traders to lock in the prices of different assets and commodities. A futures contract holds the expiration date and sets a price that can be known upfront. The stock markets can identify futures by their expiration month. For instance, November gold futures will expire in November itself.

Investors and traders in the stock market use ‘futures’ to refer to the entire asset class. However, there are different types of futures contracts available for trading. Let’s find out what they are.

Different Types of Futures

Here are the different types of futures available in the stock markets-

  • Stock Futures

These first appeared in the country in 2000. A couple of years later, the index futures were followed by stock futures. If you wish to trade in stock futures, you can get several benefits out of it. The essential one is controlled. Before trading in stock futures, you will have to deposit an initial amount with the stockbroker.

If it’s 10 % initially, you can trade in ₹40,00,000 worth of stock futures by paying only ₹4,00,000 to your stockbroker. So, the bigger the volume of your transactions, the bigger your profit will be. However, the risks involved are also quite significant. So, you need to be fully aware of the pros and cons before trading in stock futures in BSE or NSE.

  • Commodity Futures

Commodity futures will allow an investor to hedge against the price fluctuations of different commodities, including gold, petroleum, silver, agricultural products, etc. Investors also use these futures to bet on the price volatilities. The stock markets are highly volatile and are often used by large players like governments and privately held companies.

Also, investors can gain significant positions since the initial investment margins are low in commodity futures. Here, the profit potential is huge, and the risks are also high. You can trade in commodity futures in India in exchanges like the National Commodity and Derivatives Exchange and the Multi Commodity Exchange (MCX).

  • Index Futures

Index futures are used to speculate on the market activities of indices in the futures, like in Nifty or Sensex. For example, if you buy Nifty index futures at ₹50,000, with the expiration date of the same month, and if the Nifty rises to ₹55,000 during that month, you will earn a profit  of ₹5000 from your investment. Similarly, if the price drops to ₹45,000, you will lose ₹5000. Portfolio managers generally use an index futures contract to hedge their stock market positions if the price dips. Some of the index futures in India include Nifty 50, Sensex, Nifty IT, etc.

  • Currency Futures

The currency futures contract allows an investor to buy or sell a currency of some other country in the stock market at a specific rate for a pre-decided date in the future. Generally, the currency futures are used by speculators who wish to hedge risks. For instance, a trader in India can buy USD futures to guard against any kind of appreciation in the currency against the Indian rupee.
Also Read: Complete Guide on USD INR Trading

  • Interest Rate Futures

The interest rate futures contract is a little different from the rest. This type of futures contract is used for buying or selling debt instruments at a specified sum on a predetermined date. For example, the government bonds and treasury bills come under interest rate futures. If you wish to trade on interest rate futures in India, you can do so in the BSE and the NSE.

Conclusion

Now that you know the different types of futures in the Indian stock markets, it’ll be easier for you to deal with them. Although futures are generally associated with commodity trading, these are available for different asset classes.

 

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Frequently Asked Questions

The order placed by an investor for buying or selling a futures contract is matched by the stock exchange platform with the best-effort basis. Futures trading is almost similar to equity trading.

A futures contract is generally settled daily as well as on a predetermined expiry date. The daily settlement process of futures is called marking to market. It is a complex process of defining the profit or loss after each trading day.

The different types of a futures contracts are -

  • Stock futures
  • Currency futures
  • Index futures
  • Commodity futures
  • Interest rate futures