Futures Prices Definition:
Futures prices are not as simple as stock prices. But, it is easy to calculate futures prices if you understand what I mean those units. Note that futures markets and thus vary the process used to calculate the price of a particular futures market may not be appropriate for a different market.
Find the amount represented by a contract. Each futures contract is a standardized amount of the commodity being traded. For example, a soybean of commodity futures contract represents 5,000 tons of soybeans.
Understand the importance of those units. In the stock market, the trading price simply represents the value of a part of the action. In the futures market, the value refers to the amount of product represented by the futures contract. In the soybean market, those units represent paisa per bushel. Remember that each futures contract represents 5,000 bushels of soybeans.
Do not forget to consider the size of the minimum tick, which is the smallest increment that the price can move in a futures market. For soybean futures, the minimum tick size is a quarter of a paisa per bushel. This refers to those units, in which the fractions are typically expressed in round, so that a budget 950 and 950-2 represents 2/8 (1/4) paisa.
The futures prices are calculated on the basis of the quantity and those units. Using information from the example of soybeans, the number is 5,000 bushels and the price is quoted in paisa per bushel (a measure of capacity equal to 8 gallons). Assuming soybean futures are trading at 950-2, the value of a futures contract is 5,000 soybean x 950.25 paisa = 47,51,250 paisa or Rs. 47,512.50.
Example of Futures Prices in Derivative Markets:
Suppose NIFTY is trading at Rs. 7,400 then you NIFTY Future price of 3 months contract will be approximately Rs. 7,500. Where Rs. 100 is the premium amount one have to pay to purchase NIFTY future contract. Lot size of the future contract of NIFTY is 50. In the end the amount of the contract value is Rs. 3,75,000 (7,500 * 50). Buyer can purchase the contract at the margin value which is approximately equal to 10% of the contract value. Hence when you want to purchase the future contract, you will have to pay Rs. 37,500 (3,75,000 * 10%). This is the basic of future prices for almost all the markets whether it is stock market or commodity market or forex market. Rule for future prices remains the same for all.
How Dividends Effects the Futures Prices?
Most listed companies last year paid its shareholders a quarterly dividend as a part of the profits. An exception to this rule is in the technology industry, where companies tend to use its cash reserves for research and development, expanding market share and wages. This policy has led to double-digit growth in the technology sector explosives, so the lack of dividends in general has not hurt the stock prices of companies. For slower growth companies, dividends help support their market value.
After a regular or special quarterly dividend was declared, the market usually reacts accordingly, and the share price reflects. If, for example, a company pays Rs. 1 per quarter, the share price can be expected to increase the amount or the market already priced inch. The ex-dividend date is the cut after the new owners. They have to wait until the next quarter for dividends. Traders often time their buying and selling to capture the dividend without having to wait for the whole period of three months covering it.
Companies pay most of their dividends in the form of checks mailed to shareholders. Some, however, may distribute additional shares instead of cash, increasing the shares of the company owners. This process can also make stock prices fall, as more shares are outstanding and the same benefits and resources are divided among a larger group.
Mature, successful companies tend to be proud of its record of steady dividend increases, which are a reflection of higher incomes and a reliable predictor of future results. Existing shareholders and those considering buying shares look closely at this record company and make their decisions accordingly. Conversely, if a company has cut or not it increases its dividend in quarters or years, which is an indication of stagnant incomes and flat revenue growth.
A suspended key dividend represents a red flag for shareholders, and the announcement of a drastic step is usually accompanied by a large portion of trading of the shares of the company. This event can be caused by a sudden drop in income, accounting fraud, product defects or claims. Falling reputation is as serious as in the share price, which can be extremely difficult to recover.
- Tutorial Course - Basics of Futures Trading for Beginners -
» e-Learning Chapter 1: What is Futures Contract and Types of Future Contracts?
» e-Learning Chapter 2: What is Futures Trade and How to Trade in Future Markets?
» e-Learning Chapter 3: What is Leverage and Payoff? Definition with Example.
» e-Learning Chapter 4: What is Shorting or Short Sale? Definition and Rules.
» e-Learning Chapter 5: What is Nifty Futures and How to Trade in Nifty futures?
» Currently Reading: What are Futures Prices? Definition and Effects of Dividends.
» e-Learning Chapter 7: What is Hedging? Examples and Hedging Strategies.
» e-Learning Chapter 8: What is Open Interest? Examples and Analysis.
» e-Learning Chapter 9: What is Margin and M2M (Mark to Market)?
» e-Learning Chapter 10: What is Margin Trading? Advantages and Risk of Leverage.
» e-Learning Chapter 11: What is Hedger, Speculator and Margin Calculation?
» e-Learning Chapter 12: Futures Trading Quiz – Basics of Futures Trading for Beginners.