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

Usage of Stock Futures
Investors can take a long-term view on the underlying stock using stock futures.

Stock futures offer high leverage, allowing investors to take large positions with less capital. For example, by paying a 20% initial margin, an investor can take a position worth 100, which is 5 times the cash outflow.
Futures may appear overpriced or underpriced compared to the spot market, offering arbitrage opportunities for risk-less profit. Single stock futures provide arbitrage opportunities between stock futures and the underlying cash market, as well as 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 market risk or price risk of the underlying stock by taking a reverse position in an appropriate futures contract.
Understanding Futures Trading
Futures trading typically involves contracts based on the future value of individual company shares or stock market indices like the S&P 500, Dow Jones Industrial Average, or Nasdaq. These contracts can be traded on exchanges such as the Chicago Mercantile Exchange (CME), where the underlying assets might include physical commodities, bonds, or even weather events.
Key Points of Futures Trading
- Derivatives: Futures are financial contracts whose value depends on the price of the underlying asset.
- Obligation: Futures trading requires buyers to purchase or sellers to sell the asset at a set date and price.
- Hedging: Futures can be used to hedge against price fluctuations, protecting against potential losses.
Types of Future Contracts

- Futures based on individual stocks, allowing investors to trade on the future value of specific companies.
- Futures based on stock indices like the Nifty 50 or Sensex, which track the performance of a basket of stocks representing a particular segment of the market.
- These involve contracts to buy or sell a currency at a future date. Examples include futures on USD/INR, EUR/INR, GBP/INR, and JPY/INR.
- Futures contracts where the underlying asset is a commodity. Common commodities traded in futures include gold, silver, crude oil, and agricultural products like wheat and cotton.
- These are contracts based on the future movements of interest rates. In India, the most common interest rate futures are based on government bonds.
- Futures based on specific sectors of the economy, like banking, IT, or pharmaceuticals, allowing investors to speculate on or hedge against the performance of entire sectors.
How Futures Trading Works
Futures contracts are standardized for quantity, quality, and delivery terms, allowing them to be traded on exchanges. Buyers and sellers agree to transact the underlying asset at a fixed date and price, which enhances market transparency, liquidity, and price accuracy.
Contracts have specific expiration dates, often organized by month. For example, S&P 500 futures might expire in March, June, September, and December. The "front-month" contract, or the nearest expiring contract, typically has the most trading activity. Traders can sell their positions before expiration if they wish to avoid taking possession of the underlying asset.
Speculation with Futures
Futures contracts enable traders to speculate on asset prices. For instance, if a trader expects the S&P 500 to rise, they might buy a futures contract. If the index increases, the value of the contract goes up, allowing the trader to sell it at a profit. Conversely, selling a futures contract allows traders to profit from declining prices.
Hedging with Futures
Futures can hedge against unfavorable price changes. For example, a mutual fund manager concerned about short-term market volatility might use S&P 500 futures to hedge a $100 million portfolio. If the index drops, gains from the futures contracts can offset the portfolio's losses.
Pros and Cons of Future Trading
Why Trade Futures Instead of Stocks?
Futures trading offers high leverage, allowing control over large asset positions with a small amount of capital. This flexibility, combined with extended trading hours, enables investors to respond quickly to global events.
Futures vs. Options
The choice between futures and options depends on the investor's strategy and risk tolerance. Futures provide higher leverage and potential profitability but come with greater risks. Options offer a nonbinding contract, which limits potential losses.
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