Question

The process of buying or selling a future. what is involved?

Answer 1

Buying and selling futures contract is essentially the same as buying or selling a number of units of a stock from the cash market, but without taking immediate delivery.

In the case of index futures too, the index’s level moves up or down, replicating the movement of a stock price. So, you can actually trade in index and stock contracts in just the same way as you would trade in shares.

When you trade in futures contracts, you do not give or take immediate delivery of the assets concerned. This is called settling of the contract. This usually happens on the date of the contract’s expiry. However, many traders also choose to settle before the expiry of the contract.

For stock futures, contracts can be settled in two ways:

1.On Expiry

In this case, the futures contract (purchase or sale) is settled at the closing price of the underlying asset as on the expiry date of the contract.When closing a futures index contract on expiry, the closing value of the index on the expiry date is the price at which the contract is settled. If on the date of expiry, the index closes higher than when you bought your contracts, you make a profit and vice versa. The settlement is made by adjusting your gain or loss against the margin money you’ve already deposited

2.Before Expiry

It is not necessary to hold on to a futures contract till its expiry date.You can choose to exit your index futures contract before the date of expiry if you believe that the market will rise before the expiry of your contract period and that you’ll get a better price for it on an earlier date. Such an exit depends solely on your judgment of market movements as well as your investment horizons