Capital Market Chronicles – Episode 177: MORE ON FUTURES (Part I)
Welcome back to another episode of Capital Market Chronicles! Today, we’re diving deeper into futures trading in India — part finance lesson, part thrill ride 🎢💰. Buckle up!
1️⃣ Eligibility of Stocks – Not Everyone Gets a Ticket 🎟️
Not all stocks can enter the futures playground. SEBI has laid down strict rules to ensure only stable, highly liquid stocks are available for futures contracts.
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If a stock fails to meet eligibility criteria for three consecutive months, no new futures contracts will be introduced for it. ❌
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If a stock becomes too volatile — say, swinging like a monkey on a trampoline 🐒⚡ — the exchange can close all open positions to prevent market chaos.
In simple terms: futures trading is reserved for the well-behaved, predictable stocks — the golden retrievers of the market 🐕✨.
2️⃣ Cost-of-Carry Principle – The Price of Waiting ⏳💸
Ever wondered why the futures price isn’t exactly the same as the stock price today? That’s where the cost-of-carry comes in — the total expense of holding an asset until the contract expires.
Key ingredients:
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Interest Rates: Borrow money, pay interest. No free lunches here! 🏦
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Dividends: If the stock pays income while you hold it, that can offset some costs. 💵
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Storage Costs: For physical commodities like oil, grains, or gold bars, storing them safely costs extra. 🛢️🌾
✅ Rule of thumb: Later-expiring contracts generally cost more because of these accumulated costs.
⚠️ But beware: Real market prices can defy theory. Sudden demand surges or investor hype can make futures prices spike — think of it as the market doing a spontaneous dance 💃📈.
3️⃣ Types of Futures Contracts – Choose Your Adventure 🎮
Futures come in three main flavors, depending on how far out they expire:
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Near-Month Contract: Expires soon — great for traders looking for short-term opportunities ⏰
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Next-Month Contract: Slightly longer horizon — for those who like to plan ahead 👀
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Far-Month Contract: Long-term contracts — ideal for hedgers or investors with patience and stamina 🧘
Choosing a contract is like picking your rollercoaster: do you want the quick thrill or the long, looping ride? 🎢
4️⃣ Hedging vs. Price Gains – Safety First… or Adventure? ⚖️
The main goal of futures is hedging, not gambling. But there’s always a trade-off: protection versus profit.
Example: A farmer expects crop prices to drop 🌾📉. By selling futures now, they lock in a price, ensuring they won’t lose money.
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✅ Pro: Safe, predictable revenue.
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⚠️ Con: If prices rise, the farmer misses out on extra profit — the market’s way of saying, “You played it safe… but you could’ve been richer!” 💸
Hedging requires knowledge, planning, and discipline — treat it like wearing a seatbelt while riding a financial rollercoaster 🎢🛡️. You might not get all the thrills, but you won’t crash badly either.
5️⃣ Why It Matters to YOU 👀
Even if you’re not a farmer or a big institutional trader, understanding futures is key. Why? Because:
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It affects stock prices and volatility in your portfolio 📊
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It shows how smart hedgers and speculators anticipate market moves 🔮
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It’s a glimpse into the mechanics behind big-money trading, so you’re not just watching the circus from the sidelines 🎪
💡 Parting Thought: Futures are powerful tools — for hedging, speculation, or even market insight. Respect the rules, understand the costs, and approach with both caution and curiosity. Think of it as riding a rollercoaster with a helmet and a map 🛡️🎢 — thrilling, educational, and hopefully profitable!
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