What Are Index Futures And How Do They Work?

Capital markets, which include stock and bond markets, provide a platform for buyers and sellers of stocks, indexes, currencies, and commodities. To mitigate the risk associated with investing or trading in these markets, derivative markets provide unique risk management tools.

Investors, traders, hedgers, and speculators are common participants in such markets. Each of these market participants plays a unique role in the development, growth, and expansion of these markets. More importantly, they add to the market depth and liquidity, which are both required for price discovery.

Stock futures are financial contracts whose underlying asset is a specific stock. Prior to the future date, the buyer and seller agree on a price for the purchase or sale of a specified number of shares. The market lot, expiration date, unit of quotation, tick size, and settlement method of these contracts are standardized.

Index futures are financial contracts whose underlying asset is a specific index like Nifty 50 or Bank Nifty. The lot size on these contracts is the same as on stock futures. Due to the abstract nature of indices, transactions cannot be settled by purchasing or selling the underlying assets themselves.