Future contracts Basics

Future Contracts
A standardized agreement between buyer & seller in which seller have to deliver a specific assest for a fixed price to buyer on specific date & time on future basis or  in other words it is an zero –sum game between buyers & sellers. Future contract was established in 1848 the Chicago Board of trade (CBOT) one of the oldest future exchange in united states. Future contracts include few aspects such as the identity of an underlying commodity, size of the future contract, its expiration date, procedure to follow and the future price.

Assets involved in Future Trading 

Agriculture Goods (wheat, maize) etc
Natural Goods (oil, natural gas) etc
Fixed Income Securities (T-Bonds)
Foreign Currencies (pounds, marks) etc
Market Indices (S+P 500, value line) etc

Clearing House Functions
-A orderly and stable meeting place for buyers & sellers
-Safe the parties for huge losses
 For a future contract to go an initial and maintenance margin set up

Future trading accounts
A future exchange allow exchange members to trade, exchange trader may be a individual firm or a brokerage firm.

Market Participants

1. Hedgers- Hedgers are those traders who transfer price risk from an existing position. Hedgers are those traders who buy & sell in spot market in order to reduce the risk associated.
2. Speculators - These types of traders buy & sell on future contracts basis with the aim of hoping maximum profit return.

Marking Market - The process of maintaining an investor’s account in equity in order to settle the price for future contract, each day a new contract is set up while replacing the old ones. The settled price is assumed to be the purchase price of that day. On the basis of that fixed price a contract is set up. Now to these whole process price limits are set up.

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Basic Terms of Equity Derivative

Equity derivative is a financial class of derivatives whose value can be derived from one or more equity securities. Option and future are one of the most commonly used equity derivative. There are many types of derivative found over the worldwide. Here we are going to discuss a few of them.

1. Stock Option - It is one of the commonly used derivatives by the investor in order to hedge the risk, if a investor is holding a stock option position then he have the right over the stock but not the obligation to sell & buy the assets stock option have liquidity and transparency to work with them. Much care should be taken while trading in option market.
2. Single Stock future (SSF)- It is a contract to deliver a particular stock  during its designated time. The price of SSF is basically depending on price of an underlying stock plus the cost of interest minus its dividend. Trading in SSF require very low margin.
3. Warrants- Warrants are right to purchase a stock over its predetermined date. The price of the stocks here are higher as compared to underlying asset. Unlike stock option warrant price also include time premium.
4. Contract for Difference - An agreement where the seller pay the net amount of current value of the stock & its value. CFDS are available to certain countries such as Germany, Japan, Singapore, Africa, France Canada and United Kingdom. The main advantage CFD is its pricing simplicity 

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Stock Buying Tips

Stock market a big platform for investors in terms of profit return. But it should be very necessary to have right knowledge about which shares one should buy or sell while trading. Although there are certain   strategies to follow which guide regarding the proper choice of stocks which have the potential to return you big profit. We are going to describe those factors are as follow.

1.Sales Revenue - It is the amount of money that a company earns during a financial year Revenue can be calculated by multiplying price of goods and services at which it is sold to the number of units or amount of unit sold.

2.Earnings - Net income of a company that shows the figure of a company whether it is losing money or gaining. It is one of the factors which show company potential and financial strength in the market. So it is clear that an investor likes to invest in a company which has strong financial earning.

3.Debt - The amount of money that a company owns in different ways. So it should be better to invest in a company which has relatively low or no debt level.

4.Liquidity - Liquidity shows the cash holding position of a company. Company which expands its area and volume of business and assures high profit gain for investors is considering being a good investing stock.

5.Valuation - It’s the worth of a company which can be determined by the P/E ratio

Last but not least while investing one should have to do research about a company profile with the  annually report publish time to time.

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Derivative Market

A derivative market are based upon another underlying market which includes stock market, stock indices and currency market .A financial market which is a derivative market or financial instrument just like future contracts or option that can be derived from other forms of assets.

Underlying assets in derivatives

a. Precious metals like gold and silver
b. Foreign exchange rate of currency
c. Bonds of various types including long and short term negotiable debt
d. Over the counter(OTC) money market products such as loan or deposits

 Classification of derivatives

a. Forward Contract - A forward contract or “specific delivery contract” occurs between buyer and seller where long position holder (buyer) agrees to buy an underlying asset in future with a certain price. Forward contracts are traded over-the-counter and are not allowed to deal with exchange. As this contracts are bilateral contract. Forward contracts are very popular in foreign exchange market.

b. Future Contracts - An agreement between two parties of buying and selling of an asset with a specific quantity, time and place. These contracts allow trading in exchanges which defines certain standardized norms for future contracts.

c. Option Contracts - Option contracts are those contracts which give the right but not the authority to buy and sell the asset before its specified time or date. Option can be traded in various instruments commodities, financial asset, stock index petroleum products, metals etc

d. Swap Contracts - An agreement over a predefined interval of time between two parties to exchange assets. These are generally customized transactions and are helpful in problem of price fluctuation forex market.

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Basics of Option Trading

An option is a contract that gives the owners the right, but not the compulsion to buy or sell a particular asset before its specific date. An option is just an security aspect which includes stock and bonds. Its an agreed contract with certain terms and condition mentioned in it.

Still Not clear?? Just look at these example, You want to purchase a expensive new house but you don’t have sufficient money to purchase it for another two months, now you contact the dealer to provide an option to buy that house in two months for a price of $200,000, the dealer will agree and now for this option you have to pay $3000.People who purchase an option are called holders and those who sold option are called writers.

Now option trading can be done in two ways

1 Call Option - A call gives an authority to holder to buy assets with certain price during a particular period of time with the hope of increase in price of the stock before option expires. Trading in Calls has long term position.

2 Put Option - Put gives the right to sell an asset with certain price during a fixed period of time, puts can hold the stock position for short position

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FACTORS AFFECTING STOCK PRICE

Stock market the best place for investors. Before investing in market a keenly survey of the whole market should be taken. As no one predict the market correctly, so we need to know the functioning of stock market. So let’s discuss some major factors that affect stock price in the market.

1. The Stock’s Demand and Supply -  If you are using an online trading account, then you should know about the volumes of shares bought and sold during a trading session. If there are more buyers of a particular commodity, then it results scarcity which affects the price of commodity
2. Market Capitalization of a Company - To understand the company capitalization, the right way is to find the company worth. The capitalization of a company is the main indicator in finding the stock price.
3. The Earning of Stock Per Share - The profit of a company can be detected by the earning made per share. The EPS is one of the good indicator to measure company’s performance as wells as its financial status.
4. Market/Company News - It is advisable to stay clear of speculative news which aims either to break the price or inflate it.

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Brief detail on Indian stock market

 Indian share market is one of the oldest and finest markets in Asia

Trading in Indian stock market is basically done in two exchanges Bombay stock exchange (BSE) and National stock exchange (NSE)

1. Bombay stock exchange – BSE is one of the oldest stock exchanges in Asian region. It was established on 1875 with the old name as “The Native Share and Stock brokers” under the regulation act of 1965.The index calculation is based on “Free Float market capitalization”.

2. National stock exchange – NSE was established in 1990 as a demutualised electronic      exchange. This exchange uses National Securities Trading system (NSTS) which perform all auction market tasks.

Stock market Index – BSE represents collection of 30 stock samples including representative company. The base year of sensex used is 1978-79 and the base value is 100.On the other hand Nse include 50 stock indexes accounting for 24 sectors of economy.

Trading Mechanism

Trading at both exchanges is carried out through an open electronic limit order book, where order matching is done with the help of trading computer, no market makers and specialist included and the entire process is carried out automatically as order-driven which state that order placed by an investor will automatically matched with  best limit order.

Market Regulation

The regulation of stock market is done by the Securities and Exchange Board of India (SEBI) which was found in 1992 as an independent authority.

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