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Tuesday, August 5, 2008

What is a Futures contract?

A "Futures Contract" is a highly standardized contract with certain distinct features.

Some of the important features are as under:

Futures trading is necessarily organized under the auspices of a market association so that such trading is confined to or conducted through members of the association in accordance with the procedure laid down in the Rules & Bye-laws of the association.

It is invariably entered into for a standard variety known as the "basis variety" with permission to deliver other identified varieties known as "tenderable varieties".

The units of price quotation and trading are fixed in these contracts , parties to the contracts not being capable of altering these units.

The delivery periods are specified.

The seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts.

In case he decides to deliver goods, he can do so not only at the location of the Association through which trading is organized but also at a number of other pre-specified delivery centres.

In futures market, actual delivery of goods takes place only in a very few cases. Transactions are mostly squared up before the due date of the contract and contracts are settled by payment of differences without any physical delivery of goods taking place.

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