Index Of The Blog
What are Stock Futures?
A futures contract is simply a contract between two parties to conduct a transaction at a predetermined price sometime later in the future. It is a kind of a bet on the stock prospect, which is one of the many financial tradings that can be performed.
In the two parties, either one can take up any stance where one agrees to buy the share while the other sells it at some agreed price irrespective of whatever price is prevailing at that time currently.
Benefits Of Stock Futures Investing
1. Margins And Leverage
The full price is not required to be paid; unlike equity, a percentage of the total contract value known as the margin that varies between different stock futures investing is required to buy or sell that needs to be paid to buy or sell the stocks in the future.
Thus, many more shares of futures could be bought or sold compared to the equity that was capable of being purchased with that money.
Stock market leverage increases your return on investment by using the borrowed capital. If the leverage is 2, it would mean that the profits will be twice that equity profits. Future profit percentage is equity profit percentage multiplied by the leverage received.
2. Hedgings Against The Risk
Hedging is the process of strategically using financial instruments to mitigate the risk of any adverse price fluctuations. Investors hedge one investment by making a trade-in another. For single stocks, hedgings can be done easily by selling futures at a price higher than the equity. The number of futures sold should be equal to the number of equity shares, so if the prices fall, the profits from selling orders in stock futures will balance the fall in equity prices.
Risks Of Stock Future Investing:
1. Leverage
Like the boon, leverage can be a con when it comes to future trading. Lack of stable understanding about leverage is the common cause of losses in the future. At levels deemed appropriate for managing risks, exchange set margins are the minimum levels of margins required by the exchange to derive maximum gains. A trader can take up a position of 1 lakh by a meager deposit of 2500, indicating a large amount of leverage as defined by large exposures with a little cost.
2. Liquidity Risk
The level of liquidity decides whether it’s appropriate to take a trade decision or not. Lack of liquidity is why the strategy might not be executed even after having a strong trading view.
3. Settlement And Delivery Risk
Non-payment of margin calls by the clients is the cause of concern for brokers. The daily settlements are in the form of automatic debits and credits, and any shortage is collected through margin calls, i.e., an additional requirement of money or securities into the account so that it can be brought up to the minimum value.
Thus when clients fail to pay the margin calls, brokers step in to close the positions. Managing the loss is a real-time function and must be done in real-time.
Rise In The ROI
An increase in the interest rate during the investment period results in the reduced price of the held securities, which will change the investment value due to the change in the absolute value of interest rates.
With the right skills and knowledge and the tools, trading in the stock market is advantageous in the long run. The market’s performance must be monitored closely to derive the most benefits out of the market.
