What Are Futures Contract?
Futures refer to derivative contracts that obligate the buyer and the seller to transact a stock, security, or commodity at an agreed-upon future price and date. It is also known as futures contracts. The agreements are legally binding. On expiry, it must be settled either in cash or by physical delivery.
Futures trading includes many different currencies, commodities, and indexes. As a result, the trader has a wide range of available options. Traders can buy and re-sell the futures contracts any time the market is open till the expiration date. This feature makes the product popular among day traders.
Also Read: 3 important Exit Strategies for Day Traders
In this blog, we share with you information on how future trading works and what its characteristics are.
Understanding Future Trading Meaning and they Work
Futures let traders set a specific price and avoid the impact of wild price swings (up or down) in the future. With the following example, let us dig deeper into futures trading meaning.
- An airline company needs jet fuel. It can buy a futures contract by locking in jet fuel prices and quantity for delivery in the future. The contract ensures that the company avoids any unexpected increase in the price.
- A fuel distributor wants to build a steady market for fuel and stay protected against an unfortunate decrease in prices. It may sell a futures contract.
- Both parties decide specific terms for their futures contract. These include the price of the fuel, the quantity, and the delivery date.
For this example, we have taken two companies trading an underlying commodity because their business depends on it. But not every trader wants to exchange a product in the future. Some speculators or futures investors want to earn profits off of price fluctuations in futures trading.
Also Read: How to trade in F&O
Characteristics of Futures Trading Contracts
Futures contracts are an investment vehicle. They allow buyers to bet on the future price of a security or commodity.
Here are some futures trading basics you should be aware of:
The contracts in the derivatives market are not for a single stock. Each stock futures contract comprises a fixed lot of the underlying stock. The exchange in which the stock is traded determines the lot size. The contract or lot size for one share differs from the other. For example, the futures trading contract of Company A can have a lot of 250 shares, while the contract for Company B can have 150 shares.
Know More about F&O Stock List with Lot Size
Futures trading contracts specify terms for a transaction in the future. When in the future depends on the duration of the contract. You can choose from a duration of one month, two months, and three months. Based on the duration, the contracts are near month, middle month, and far month contracts, respectively. After the expiration, a new contract is available for these three durations.
The month in which the contract matures is known as contract month. Regardless of the duration, futures contracts are simultaneously traded on the exchange and expire on the last Thursday of the contract month. For instance, if you buy a far month (3-months) futures contract in July, it will mature on the last Thursday of September. If the last Thursday is a holiday, it expires on the previous trading day. On completion of the first month, a far-month contract becomes a middle-month contract, and thereafter, a near-month contract.
Futures contracts are available on many assets, such as currencies, stock market indices, agricultural products, and oil. Entering the intraday futures trading market is easy. All you need to do is open an account with a broker that supports the market in which you want to trade.
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How to Trade in Futures and Options?
Futures and options trading was introduced in Indian stock exchanges in 2000. Futures and options are known as derivatives because they derive their value from an underlying asset. However, the two are not the same. Futures trading differs from options trading in some ways.
Futures & Options Trading and How to Make Money
Investing in futures and options comes with its risks. Most seasoned traders believe that you require a lot of funds to start futures and options trading. But some individuals have started small and earned fortunes. Therefore, it is your trading ability that makes all the difference.
Futures and Options Stock List with Lot Size
In the share trading market, futures and options (F&O) are two types of stock derivatives. F&O are known as stock derivates because they are essentially contracts whose prices are derived from underlying assets such as commodities, shares, ETFs and others.
A futures contract lets investors carry out a stock transaction at a specific price for delivery at a future date. In the case of options, the call option helps investors purchase the common stock for a particular price at a future date, while the put option lets them sell the common stock.
Frequently Asked Questions
Mostly, futures trading happens before its expiration date. If the trader is only speculating, he or she trades the contract before it expires, seeing its profitability. But, for a futures contract traded on the expiration date, the terms mentioned on the deal will apply. The settlement can be in cash or delivery of the physical asset. Nevertheless, a majority of brokers do not prefer the physical settlement. Thus, they will encourage you to settle the contract by paying a nominal fee.
Yes. You can sell a futures contract before the expiration date. Many traders speculate to earn profits from stock futures trading.
In stock futures, the buyer and the seller are obliged to transact the underlying stock at a predetermined price and date in the future. On the other hand, in stock options, there is no such obligation. The buyer can choose to buy or sell the underlying stock at any time. The price of stock futures is impacted by the prices of the underlying stock. But, in the case of stock options, volatility of the underlying stock also affects the price.