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Last Updated Date - Feb 17, 2023

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Know everything about Nifty Futures here. Also, understand about Nifty Future variants

About Nifty Futures

Index Futures is quite popular among traders who are regular at trading in the derivatives market. Did you know that in the derivatives market, Nifty futures happen to be the most traded instrument?

It is the reason why it has a high degree of liquidity, attracting more traders to trade in it. Speaking in global terms, it is among the top 10 traded derivatives index.

The basic definition of a futures contract remains the same. A future is a financial instrument which derives its value from the value of an underlying asset.

In the case of Nifty Futures also, the underlying asset is the index price itself. Thus, it is right to say that the value of Nifty futures depends on the value of the Nifty Index.

Consequently, if the value of the Nifty index were to go up, the future price of the index will also increase.

And, if the value of the Nifty index were to go down, the future price of the index will also fall.

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    Nifty Future Variants

    All other features of Nifty Futures remain the same as any other futures option. So, let’s say we talk about the variants of the nifty future.

    Like all other future options, it is available in three variants which are current month, mid month and far month.

    There can be a slight variation in the price of an index in the spot market and the futures market. This will happen only due to a slight difference in the pricing mechanism of future security.

    Every index future is available for a certain lot, same as any other equity future. So, for example, if the trading price of Nifty futures today is INR 11400 and as a trader, you would like to buy it.

    Let us say that the minimum lot size to buy the index future is 100. So the total value of the contract which you enter into will be equal to 11400 * 100 = INR 1140000

    Same as the equity futures, you will also have to keep aside a particular margin to enter into an index future.

    The concept of impact cost in Nifty Futures

    The concept of liquidity in the futures market is quite relevant. Imagine if there were to be no liquidity in the market. It would become a hassle for traders to buy and sell securities.

    The element of liquidity makes it possible for traders to easily buy and sell securities. They are able to enter and exit a position of their choice in the futures market.

    Liquidity of a stock has a high impact on how far traders find it convenient to trade in a particular security.

    So, if a particular equity future is highly liquid, it becomes very easy for a trader to buy or sell that particular stock at their own discretion.

    This is why more number of seasoned traders would like to trade in stock such as this one. As a result, there would be no major price fluctuations in its price either.

    Notably, a lot of institutional investors also find it attractive to invest in highly liquid stocks. There is an indirect proportion between the liquidity of a stock and its volatility.

    Example of Trading Liquid Stocks

    Taking an example will reveal that placing a market order for a highly liquid stock can be a seamless experience for a trader. Let us assume the example of a stock ABC.

    Let us suppose that as a trader, you would like to purchase the stock. However, you are planning to buy a quantity of 5000 shares of ABC which have a value of INR 39000 each.

    Purchasing the stock in the spot market would mean that you will have to shell out around 19 crore rupees to buy these many stocks.

    Now, even if you may have no problem in spending that much money to buy the stock, there may be a problem with its liquidity.

    When you place an order for a large number of stocks, it is imperative to check how many of them are being offered for trade in the market.

    Now, let us say, that the market trade is taking place only in 4000 shares. Clearly, it is less than the order size that you want to place for the stock.

    Thus, it will be right to say that there is a lack of liquidity in the market for ABC.

    Assessing Stock Liquidity

    A trader can also assess the liquidity of stock by measuring the ratio between the bid and ask.

    When placing a market order, a trader should also look at the impact cost of placing such an order.
    You may question, what an impact cost is after all!

    The impact cost is a type of loss which emerges from an executed trade. This type of loss is always expressed in the form of percentages. They always pertain to the average of bid and ask prices of a stock.

    This type of round tripping loss will occur to a trader when they purchase a stock at the first available selling price and sell a stock at the first available buying price.

    If we try to imply this concept on the example we took above, it will roughly translate as follows:

    Buying price = INR 39000
    Selling price = INR 38266

    It is interesting to note that all types of round trips only result in losses for the investor. The loss to the investor, in this case, will be as follows: = 39000 – 38266 = 734

    The average of bid and ask will be calculated as follows: = 39000 + 38266 / 2 = 38633

    Impact cost on these numbers will be calculated as follows: 734 / 38633 = 1.8%

    This means that if you were to place an order for ABC stock, it is likely that you may lose out 1.8% of the value of the contract to impact the cost. This number may not strictly be true and it is possible that in some cases, you may not have to incur the impact cost.

    However, this does not mean that the idea of impact cost does not apply. The impact cost basically affects the price for which you trade in security and the price of the security which you see on the screen.

    Let us see how this 1.8% impacts your overall loss

    Let us assume that you buy a security at a price of INR 11500. The price at which can sell this security is INR 11499. The round trip loss associated with this trade will be = 1 (11500 – 11499)

    Average ratio of bid to ask = (11500 + 11499) / 2 = 11499.5

    Impact cost will be = 1 / 11499.5 = 0.0087%

    This means that trading in nifty futures at market price will make you lose only 0.0087% of the cost. but, trading in the stock ABC will cost you 1.8%. It is clear how liquidity stands to impact the trades which you enter into.

    Thus, we can say that, due to the element of impact cost, stocks gain liquidity. The higher the liquidity, the lesser is the impact cost. The more the liquidity, the lesser is the volatility in the stock.

    Judging by the impact cost of ABC, we can say that it is not liquid enough, in contrast to the impact cost of nifty futures.

    To Conclude Nifty Future

    As a derivative, an index future derives its value from the value of an index. In the present market context, the lot size of Nifty Futures is 75.

    There is a reason why traders choose to trade in Nifty futures in India, making it one of the highest traded future indexes all across the globe.

    The concepts of impact cost, liquidity and volatility have a major role to play when it comes to impacting the ease of trading in a futures index.

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