Stock Market Futures
Its a 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, and unit of price quotation, tick size and method of settlement
Stock futures offer a variety of usage 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 positionfor 100 i.e. 5 times the cash outflow.
Futures may look overpriced or under priced 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.
Why Futures are popular
There is no delivery.
When you buy in the cash segment (where investors buy and sell any number of shares and hold them in demat accounts), the shares are delivered to you and sent to your demat account.
Over here, there is no delivery so you do not need a demat account.
The brokerage in Futures is much lower. It will be around 0.03% to 0.05% of the transaction. These are the rates given to regular investors. An occasional investor may end up paying up to 0.1% as brokerage.
In the cash segment, the brokerage will be around 0.25% to 0.75%.
When you buy shares in the cash segment, you have to make the entire payment to your broker.
Within two days, you will have to make the full payment to your broker.
In Futures, you just pay the margin, not the entire amount.
Can effectively short sell
When you sell shares without owning them, it is known as short selling. You would do so if you believe that the price of the stock is going to drop. This way, you sell it at a higher rate and buy it at a lower rate later.
With Futures, you do not have to square your transaction at the end of the day. You can square the transaction whenever you want or wait till it expires on the last Thursday of the month. But, in the cash segment, you have to square your transaction by the end of the day, so you can short sell just for a day