What are Index Futures? What are the benefits of trading in them?
A stock market index measures the performance of the stock market or a subset of it. It comprises of a basket of stocks that indicate general price movements in the market. Stocks included in an index are required to satisfy certain conditions with respect to market capitalisation, liquidity, etc. Hence, they help analyse current stock price levels. Some important indices include NIFTY, SENSEX, BANKNIFTY.
Index Futures are futures contracts with a stock market index as its underlying security. They allow traders to speculate and trade in the 'entire' stock market and cash in on general price movements in the underlying securities. Since it is not possible to physically deliver an index, such contracts are cash-settled on a daily basis.
Advantages of trading in Index Futures include:
- They are highly liquid contracts; easy to trade.
- They can be traded with low initial capital and margin requirements.
- They provide higher leverage than individual stocks.
- They are relatively less risky when compared to holding individual stocks.