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What Are Futures?
Chapter 1 of 5
A futures contract is a legally binding agreement to buy or sell an underlying asset — an index like Nifty, or a stock — at a predetermined price on a fixed future date. Unlike options, futures create an obligation, not a right. Both buyer and seller must settle.
Futures vs Spot — Key Differences
| Feature | Spot / Cash Market | Futures Market |
|---|---|---|
| Ownership | Buy stock, own it | Contract — no ownership |
| Settlement | T+1 delivery | Marked-to-market daily; expiry |
| Capital required | Full price | ~8–15% margin only |
| Leverage | None (unless MIS) | ~7–12× built-in |
| Expiry | No expiry | Last Thursday of month |
| Short selling | Intraday only (MIS) | Carry overnight freely |
| Who uses it | Investors, swing traders | Hedgers, speculators, arb |
💡Why Futures Exist
Futures were invented for hedging. A farmer could lock in a crop price months in advance. In equity markets, a fund manager long ₹100 crore of stocks can short Nifty futures to hedge market-wide risk — without selling a single share. Speculators provide the liquidity that makes hedging possible.
Three Participants
Hedgers — reduce existing risk (like a fund manager).
Speculators — take directional bets for profit.
Arbitrageurs — exploit price gaps between spot and futures.
Speculators — take directional bets for profit.
Arbitrageurs — exploit price gaps between spot and futures.
Index vs Stock Futures
Index futures (Nifty, BankNifty) are cash-settled. You never exchange the actual stocks. Stock futures can involve physical delivery if held to expiry.
Three Monthly Contracts
At any time, three contracts trade: near month, mid month, far month. Near month is most liquid. After expiry, a new far-month contract opens.