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What are futures?

Futures contract

A futures contract is a type of financial contract where two parties agree to transact a set of financial instruments for future delivery at a particular price. On the NSE, where most volume is traded, a trader can trade Index, Stocks, or Currency Futures.

The most common Future contract traded in India are Nifty Futures.

Example

A better understanding of Future contract can be explained through an example. Suppose Raj wants to purchase a computer which costs Rs. 20,000, but he is short on cash and decides to purchase it one month from today. However, Raj feels that one month from now, the price of the computer will increase. Therefore, Raj is puzzled: how do I purchase the computer today and lock in the price of Rs. 20,000 but get delivery of the computer in 30 days?

Raj enters into a contract with the computer manufacturer: one month from today, Raj will purchase the computer for Rs. 20,000 and the manufacturer will deliver the computer to Raj. Raj is being cautious and agrees to purchase the computer at today’s price, 30 days from now. Thus, as defined above, it is a contract with a specified date and price for delivery. There is no cash exchanged between the parties when the contract is initiated.

Futures trading, therefore, is the buying and selling of these contracts.