An equity future is a financial agreement written between a buyer and a seller. The seller is obligated to sell an asset either in the form of a financial instrument or a physical product at a specified time and price in the future to a buyer.
The contract includes the quantity and the quality of the asset. Investors use equity future to speculate or hedge. Investors who use futures to hedge do so to reduce the risk of price decrease in the future. However, equity futures used for speculative purposes are bought to take advantage of price increases in the future.
Ways of Trading Equity Future
Equity future involves a lot of money, and this option of trading presents the highest risk of loss. The risk is high because you do the trading on your own without support from a broker. Brokers have experience in the trade, so they know how to avoid risks. If you choose to trade for yourself, you will need to carry out all trading activities. They include;
- Maintaining margins
- Managing funds
- Carrying out research for an analysis of the market trends
- Ordering trades
For you to do it successfully, you will need to allocate a lot of time to the market. You will also need to be very attentive and good in analysing and predicting outcomes.
For you to use this method, you need to open a managed account which is run by a broker. You will need to pay the broker a management fee for him to run your account. This method is suitable because a qualified professional runs the account. They make informed decisions regarding your future equity. Unfortunately, you will be liable for the losses incurred. On the other side, you enjoy the profits margins alone.
Of the three trading alternatives, community pool has the smallest risks. A community pool has more than one commodity that members invest in. All members are at liberty to contribute as much capital as they wish to. As a result, the profits and losses are shared according to the proportion of individual contribution. To maximize the profits, ensure that you hire an experienced broker to run your account.
Types of Equity Futures
There are two types of equity future: Stock futures and index futures
Stock future involves buying and selling a set of stocks at a predetermined price at a specified date. Characteristics of stock future are the following:
- Future-oriented. The contract signed is for a transaction that will take place in the future. The future is divided into months. The first month is called the near future; the second one is referred to as the middle month while the third one is called the far month. The month in which the contract expires is known as the contract month. When the first month expires, the second month becomes the near month and the far month becomes the middle month. A new contract is signed after the old contract expires: the next day after the expiry day.
- Slices. The contract size traded consists of more than one share. It is not possible to exchange with a single share. The lot or contract size is determined by the specific share that is involved in the trading.
In this kind of trading, the stock index is used to trade. The stock of similar companies regarding size and industry are constructed to come up with an index. The indices represent an overall market or a section of the market. Investors make money when the index performs well. Characteristics of index future include:
- Lot sizes. Investors buy lots of indices. Stock indices points are sold with each having a specific lot size.
- Settlement. Since an index future relies on abstract market concepts, a settlement is made by opposing a transaction before or on the expiry date.
- Time of closing. Index futures have three contract series just like stock futures. There is a near month, middle month and far month kind of contract.
Future trading is a lucrative investment, but you need to be sure how you want to do it and the type that you want to invest in. The agreement governs the terms of the agreement. To be able to benefit from future equity trading, contract a professional to do it for you.