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Stock Futures are financial contracts where the underlying asset is an individual stock. Stock Future contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller. The contracts have standardized specifications like market lot, expiry day, unit of price quotation, tick size and method of settlement.can edit every single element.
The theoretical price of a future contract is sum of the current spot price and cost of carry. However, the actual price of futures contract very much depends upon the demand and supply of the underlying stock. Generally, the futures prices are higher than the spot prices of the underlying stocks.
Futures Price = Spot Price + Cost of Carry
Cost of carry is the interest cost of a similar position in cash market and carried to maturity of the futures contract less any dividend expected till the expiry of the contract.
Example: Spot Price of Infosys = 1600, Interest Rate = 7% p.a. Futures Price of 1 month contract=1600 + 1600*0.07*30/365 = 1600 + 11.51 = 1611.51
In stock options, the option buyer has the right and not the obligation, to buy or sell the underlying share. In case of stock futures, both the buyer and seller are obliged to buy/sell the underlying share.
Risk-return profile is symmetric in case of single stock futures whereas in case of stock options payoff is asymmetric.
Also, the price of stock futures is affected mainly by the prices of the underlying stock whereas in case of stock options, volatility of the underlying stock affect the price along with the prices of the underlying stock.
Stock futures offer a variety of usages to the investors. Some of the key usages are mentioned below:
Investors can take long term view on the underlying stock using stock futures. Stock futures offer high leverage. This means that one can take large position with less capital. For example, paying 20% initial margin one can take position for 100 i.e. 5 times the cash outflow.
Futures may look overpriced or underpriced compared to the spot and can offer opportunities to arbitrage or earn risk-less profit. Single stock futures offer arbitrage opportunity between stock futures and the underlying cash market. It also provides arbitrage opportunity 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 position in cash segment can minimize either market risk or price risk of the underlying stock by taking reverse position in an appropriate futures contract.
Presently, stock futures are settled in cash. The final settlement price is the closing price of the underlying stock.
The investor can square up his position at any time till the expiry. The investor can first buy and then sell stock futures to square up or can first sell and then buy stock futures to square up his position. E.g. a long (buy) position in December ACC futures, can be squared up by selling December ACC futures.
The initial margin needs to be paid to the broker on an up-front basis before taking the position.
Yes. The outstanding positions in stock futures are marked-to-market daily. The closing price of the respective futures contract is considered for marking to market. The notional loss / profit arising out of mark to market is paid / received on T+1 basis.
The profits and losses would depend upon the difference between the price at which the position is opened and the price at which it is closed. Let an investor have a long position of one November Stock ‘A’ Futures @ 430. If the investor square up his position by selling November Stock “A” futures @ 450, the profit would be Rs. 20 per share. In case, the investor squares up his position by selling November Stock “A” futures @ 400, the loss would be Rs. 30 per share.
For market lot ands other details of the various stock futures available on BSE, please visit the F&O List Section.
According to L.C.Gupta Committee Report on Derivatives, at the time of introduction of Derivatives Contracts on any underlying the value of the contract should be at least Rs. 2 lakhs. This value of Rs. 2 lakhs is divided by the market price of the individual stock to arrive at the initial ‘market lot’ for it. It may be mentioned here that the only exception to this rule is the ‘mini’ contract on the S&P BSE SENSEX (both futures and Options).
Similarly, you can enter an order for Sell Nov Dec stating the difference you want to receive. This would mean that you are selling a December Contract and buying a November Contract and receiving the difference.
1, 2 and 3 months contracts are presently available for trading. However, in case of S&P BSE SENSEX Options, SEBI has allowed the introduction of Long Dated Options or options with maturities of up to 3 years.
One can trade in spread contracts on the Derivative Segment of BSE. Spreads are the contracts for differential price. This means that in case you want to buy a December contract and sell November contract, you can enter an order for Buy Nov Dec stating the difference you want to pay. This would mean that you are buying a December Contract and selling a November contract.
Deposit upfront the initial margin Similarly, you can enter an order for Sell Nov Dec stating the difference you want to receive. This would mean that you are selling a December Contract and buying a November Contract and receiving the difference.
You need to first register yourself as a client with a Registered Broker by fulfilling all the KYC or Know Your Client rules. Then, sign up the client agreement form and risk disclosure document provided to you by your broker. Deposit upfront the initial margin Now start trading!!
You can pay initial margin in non-cash (bank guarantee, securities) form also. This is an arrangement between you and your broker, as to which securities he/she is willing to accept. However, the mark-to-market loss incurred on a daily basis has to be settled in cash, only.
The holder of the physical stock can sell a future to avoid making a loss without having to sell the share. Any loss caused by the fall in the price of the stock is offset by gains made on the stock future position.
An investor can benefit from a predicted rise in the price of a stock by buying futures. As the price of the futures rises, the investor will make a positive return. As the investor will have to pay only the margin (which forms a fraction of the notional value of the contract), his return on investment will be higher than on an equivalent purchase of shares.
An investor can benefit from a predicted fall in the price of the stock by selling futures. As the price of the future falls in line with the underlying stock, the investor will make a positive return.
This trading strategy involves taking a position on the relative performance of two stocks. It is achieved by buying futures on the stock expected to perform well and selling futures on the stock anticipated to perform poorly. The overall gain or loss depends on the relative performance of the two stocks.
Similarly it is possible to take a position in the relative performance of a stock versus a market index. For example, traders who would like to take only company-specific risk could buy/sell the relative index future.
It is physical product that can be traded—bought, sold, produced or consumed. For example, gold is a commodity that is sold or purchased. Food grains, meanwhile, can be produced, sold, bought and purchased.
You trade commodities at the various Commodity Exchanges in the country.
This is the market place where you trade in Commodities. At present, commodities can be traded on three national-level exchanges in the country: Multi Commodity Exchange of India Ltd (MCX), National Commodity and Derivative Exchange (NCDEX) and National Multi Commodity Exchange of India Ltd (NMCE). There are also 21 smaller exchanges that offer commodities trading at the regional level
In the derivatives market, you are entering into an agreement to sell or buy at a future date at a certain price. This agreement cannot be verbal. It has to be a generally accepted document. A contract signifies this agreement. It specifies all details like the quantity, the date of transaction (in future), the price at which the commodities will be traded, the quality of the commodity and the delivery location.
When you enter an agreement to buy a commodity at a future date, it need not be a fixed agreement. You can choose to not buy at that date too, right? This is the key difference between a Futures and Options contract.
A Futures contract does not allow you to go back on the agreement. An Options contract does. When the date of transaction arrives, you can choose to ignore it if you purchased an Options contract. However, this rule only applies if you agree to Buy. Sellers cannot go back on their agreement.
Every Futures and Options contract is standardized on the commodity exchange. For example, the quantity denominations and delivery schedules are usually fixed or follow a fixed pattern. This is not so for Forwards contracts. They are exactly like Futures contracts, but without the standardized pattern. Forwards are not traded on the Exchange.
In market parlance, a long position is when you agree to buy in the future. For example, you buy a contract to ‘Buy’ copper one month down the line.
This is the opposite of a ‘long’ position. When you take a ‘short’ position, you agree to sell. Suppose you bought a contract to ‘Sell’ copper one month later, you are taking a short position.
Until 2015, trading on all the commodity exchanges In India was regulated by Forward Markets Commission (FMC). After that, it was merged with the Securities Exchange Board of India (SEBI). Since the merger, it is the securities market regulator SEBI that regulates commodities trading in the country.
At a stock exchange, the stocks bought and sold represent partial ownership in the company which originally issued the stock. At a futures exchange, contracts are bought and sold. The contracts are standardized as to quality, quantity and delivery time and location. The only variable is price, which is ‘discovered’ in trading on the exchange floor. The contracts represent the intent to accept or deliver a quantity of a commodity, for example, corn, soybeans, or Treasury bonds, at some future date.
A short position involves selling futures contracts or purchase of a cash commodity without offsetting an offsetting futures transaction. (A cash commodity is an actual, physical commodity someone is buying or selling, such as corn or soybeans, also referred to as actuals.) A long position involves buying futures contracts or owning the cash commodity.
A bull market is a period of rising market prices.
A bear market is a period of declining market prices.
Currency Derivatives are Future and Options contracts which you can buy or sell specific quantity of a particular currency pair at a future date. It is similar to the Stock Futures and Options but the underlying happens to be currency pair (i.e. USDINR, EURINR, JPYINR OR GBPINR) instead of Stocks.
For currency futures and options, underlying asset is the currency pair at currency exchange rate. For equity futures, the underlying asset is the equity share of respective company.
Following are the participants in Currency Trading:
All Currency contracts expire two working days prior to the last business day of the expiry month at 12 noon.
In NSE for Currency Derivatives the trade timings are as follows: Trading Session- Monday to Friday
Friday- 9:00 AM to 5:00 PM Intraday Square Off- Monday to Friday – 30 minutes prior to market closure
You can trade in following products in Currency derivatives segment:
1.Carry Forward – You can take both Futures and Options position in this product with margin % charged defined by exchange. The Carry Forward positions are carried forward to next trading day unless you square off the position or the expiry date is reached.
2.Intraday – You can take only Futures position in this product with lower margins, but these positions will have to be necessarily squared off by day end.
You can trade in either of the products in both PIB and Trading website by selecting Product Type in Order entry window.
The system will automatically square off your Currency intraday futures open positions 30 minutes prior to market closure. This timing is subject to change depending on the market conditions on any given day.
Yes, you can convert your Currency F&O position taken on current day from Carry Forward product to Intraday and Vice-versa in Intraday position Report.
The Exchange Traded Currency Derivative market is regulated by SEBI through the recognized stock exchanges. The Foreign Exchange Management Act is the law, which regulates the Foreign Exchange market and the regulatory authority for the Indian Foreign Exchange Market is the Reserve Bank of India (RBI).
All Currency contracts – Futures and Options on NSE are cash-settled.
Generally, Currency futures and options contracts require a margin percentage of the contract value, i.e. defined by exchange. The exchange also requires the daily profits and losses to be paid in/out on open positions (Mark to Market or MTM) so that the buyers and sellers do not carry a risk for not more than one day.
Yes, same margin can be used to trade in both Equity and Currency segment.
Yes, there is a daily price range (DPR) to safeguard the interests of general investors from the extreme volatilities in markets for preventing any unexpected fall or rise beyond a limit. In case price goes beyond the range, the contract is freezed for particular time duration by the exchange and new DPR is given by exchange for respective contract.
Mutual Funds can meet the investment objectives of almost all types of investors. Younger investors who are willing to take some risk while aiming for substantial growth of capital in the long-term will find equity schemes (i.e. funds which invest in stocks) an ideal option.
Older investors who are risk-averse and prefer a steady income in the medium-term can invest in income schemes (i.e. funds which invest in debt instruments). Middle-age investors can allocate their savings between income funds and equity funds and achieve both income and capital growth. Investors who want to benefit from regular savings can put aside a small sum every month in a Systematic Investment Plan.
Net Asset Value is the market value of the assets of a scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.
Purchase Price is the price an investor pays when investing in a scheme. It is also called as the Offer Price.
It is the price at which Open-Ended schemes repurchase their units and Close-Ended schemes redeem their units on maturity. Such prices are NAV related.
Exit Load is a charge collected by a scheme when it buys back the units from unit-holders. It is also called as Repurchase Load & Exit load is applicable for a specific period from the time of purchase (as specified from time to time), and beyond this period, no exit load is applicable on redemption.
Application forms are usually available at all Mutual Fund branch locations and at the Registrar Branch locations where the Mutual Fund operates. On request, the application could be sent by e-mail to the customer or by courier. Application forms are also available online — under the downloads section on the website. The customer has to take a print of the application form, fill in the details and submit it at the nearest Investor Service Centre.
Cut-off timing is the time before when an investor must submit / lodge his / her application form for the date of submission / lodgement to be considered as the transaction date. For applications submitted / lodged after the cut-off time the applicable transaction date is the next business day. Depending on the transaction date the NAV is applicable.
The Scheme Information Document contains the details of the scheme that the AMC or sponsor prepares for and circulates to the prospective investors, inviting subscription to the units of the Scheme(s).
The Statement of Additional Information contains details of Principal Mutual Fund including its constitution, certain tax, legal and general information and legally forms a part of the Scheme Information Document.
The Current Value of Investment is the Market Value of the Investment based on that day’s NAV of the Investment in which the Scheme is invested Scheme – Plan of a Mutual Fund.
On all business days, depending on the scheme type, NAV is declared in the evening at or before 9 pm.
Systematic Investment Plan (SIP) is a simple, time-honored strategy designed to help investors accumulate wealth in a disciplined manner over the long-term and plan a better future. This disciplined approach to investing also provides following benefits:
Power of Compounding
Rupee Cost Averaging
A SIP or systematic investment plan is where you ask the mutual fund to deduct a certain amount from your bank on say the 5th or 15th or 25th of each month. You will be allotted units in your folio as per the NAV on the purchase date. In a lump sum investment, you buy units on any given day.There is no difference between a SIP and lump sum investment.
From an investing perspective, there are three types of mutual funds
Equity mutual fund: A fund that invests at least 65% of its portfolio in Indian stocks.
Debt mutual fund or fixed income mutual fund: A fund that invests predominantly in bonds (a tradeable fixed deposit)
Gold mutual fund: A fund that tracks the price of gold
Hybrid mutual fund: A fund that invests in a little bit of equity, a little bit of time bonds, a little bit of gold. That little bit can be constant or vary from time to
There are equity funds knowns as Equity Linked Saving Schemes (ELSS). Your investments up to Rs. 1.5 lakh a financial year will be exempt from tax (section 80C). Each unit you purchase will be locked up for 3 years though.
So that is the first set of questions and my stupid answers. To be continued. I am sure many of you do not agree with some of my suggestions, but I think it is better for a newbie to start slowly instead of opening a SIP from day one.