Trading
in futures has the element of speculation when one tries to lock on the price
of a security going up or down on a specific date. Speaking of which, a
security can be in the form of a stock, stock index, commodity or currency.
Unlike the investment in stock and bond, in futures the trader doesn’t own any
commodity but speculates on the futures price of the security. Buying a futures
contract involves two very important aspects of trading i.e. buying and
selling. A trader sells his security when he predicts the prices are going to
fall and buys when the trader expects prices going up.
A
futures contract is standardized and it trading is done through a futures exchange
in order to buy or sell underlying financial instrument at a certain date in
price. The future date is referred to as delivery date. Delivery occurs in both
options and futures contract but the delivery of the underlying commodity are
rare as the generally contracts are closed before settlement. In a futures
contract you can do equity trading and commodity trading
and opportunities are
endless with this dynamic financial instrument.
Securities & Exchange Board
of India (SEBI) is the apex body regulating the futures exchange and safeguard
against traders from controlling the market in an unethical fashion and
preventing fraudulent activities from overwhelming the market.
There are two categories in which
the traders can engage in futures contract:
In general Hedgers utilize for
shielding against radical future price movement in the underlying security. The
objective of hedging is based upon the tendency of cash prices and futures
value to move in tandem. It is done for minimizing the risks involved in the
adverse movements in an asset. Normally a hedge comprises of taking an
offsetting position in a related security such as the futures contract.
Speculators are the second type
of players in futures. These include individual traders and investors.
Speculators in futures have distinct advantages over other investments. The
success of speculation depends on the trader’s judgement and if so then he can
make a lot of money in futures market because futures prices tend to change
quickly then stocks or real estate.
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