Equity v/s Future Contracts In Indian Trading Market

Investment in stock market assures maximum profit return for an investor. While investing mostly people do the same mistake while assuming stocks & future are same. Here we are going to differentiate stock and future contracts.

a)  Own a Stock  and You Contract The Future

Traders first buy a stock and enter into future contracts. Whenever an investor buys a stock he is supposed to be buying a part of the company in which he is going to trade this is why stocks are also referred as “shares”.On the other hand in future contract in spite of buying any commodity like cotton, wheat or corn , you just settled a contract in which an investors may be a buyer or seller based on the future price of commodity. For example if you found that the price of silver is moving higher then you contract as a buyer of silver with the hope of raising the price and vice versa.

b) Future Contracts Involve Buyer & Seller 

Future contracts held between buyer & seller so if one is assuming that the price of commodity is moving high than the other one assumes that the price is moving down. This means the future contracts are usually zero sum trade.As in the commodity market liquidity is maintained, no such exception occur like someone holding the opposite position.

c) Valuable Profit Return

When an investor buying a stock from a company he is supposed to be investing his money into that company hoping of gaining the maximum profit return. However the profit gaining is depend upon the value of the stock as well as company itself. Well in future a contract is agreed between a buyer & seller there is no Enron type of experience. Someone is there to handle the other side of contract.

d) Time Limit of Future contract 

 As it name suggest that future contract are mainly delivery of a commodity in future which have a fixed time delivery month. Such as if the corn has a November month of delivery the it will only deliver in November month.

So by considering all these points now we are cleared how to deal with stock as well as future contracts.

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