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What Are Stock Futures?

Stock futures are contracts between two parties, who agree to exchange stocks at a predetermined price some time in future.

Stock futures are contracts between the buyer and the seller, agreeing to exchange a predefined quantity of a stock at a fixed price (which is the future price), at a future delivery date. The specifications like lot size, price per unit, expiry date, method of settlement, etc. are defined at the time the contract is made.

Stock futures are contracts between the buyer and the seller, agreeing to exchange a predefined quantity of a stock at a fixed price, at a future delivery date.

Futures are usually traded in lot sizes ranging from 125 to 8000, depending on their underlying price; multiple lots can be traded in one contract. Since these are futures contracts, the broker usually allows clients to trade on margin. This means that the trader can buy/sell lots worth more than the available cash balance in his trading account.

Traders usually take either 'long' position or 'short' position while entering into such a contract. Long position entails buying the contract at a lower price and selling it within the specified period at a higher price. Conversely, a short position means selling the contract first at a higher price and then buying it again at a lower price, thereby making profit from the difference in price.

How are stock futures priced?

While the real price of a futures contract changes according to the change in demand and supply, theoretically it is the total of the current price and the cost of carrying,minus dividends (if any). The interest charged from the start of the contract till its maturity is known as cost of carrying.

So, the price of a futures contract = spot price + the cost of carrying – dividends

Let us understand this with the help of an example. Suppose the stock of ABC company is traded at Rs 1,000 in the spot market with a prevailing interest rate of 7 percent,and there are no dividends declared. The price of a futures contract of 1 month for that stock will be calculated as follows:

Price of the futures contract = 1,000 + (1,000 x 0.07 x 30/365) = 1,000 + 5.75 =Rs 1,005.75

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