Nifty (NSE Nifty) is a portfolio of 50 stocks of NSE which make up an index value which in its full form is called NSE Nifty. The present level of the Nifty is fluctuating around the 5000 mark. The Nifty is traded on the National Stock Exchange (NSE) of India. It is jointly owned by CRISIL and NSE through IISL (India Index Services and Products Ltd.)
The Nifty index reflects 23 sectors of the economy. The Nifty tracks the movements of 50 shares of prominent Indian companies. The complete picture of ‘what is Nifty futures’ can only be understood if we make a study of futures trading. A futures trade is a sort of bet. The duration of the bet can be one day or three months.
Nifty Futures Trading
A contract in futures is an agreement between two parties regarding the sale and purchase of shares of a company at a future time. The intriguing part of the deal is that although the share will change hands in the future the price between the two parties is arrived at in the present. The day the shares will change ownership is called the delivery date.
The buyer in this case expects the price of the share to rise in the future, while the seller feels that the share will fall in the days leading to the delivery date. In this case both are speculating on making a profit on the price they have settled in the present. In this case the buyer has a long position while the seller has a short position. The trade can be done in shares as well as in commodities.
A big aspect of understanding ‘what is Nifty futures‘ is that the National Stock Exchange is the intermediary in this contract. This is enforced through margin money kept with the NSE on behalf of both the buyer and the seller. Daily fluctuations make a profit for one party and a loss for the other party. The difference is credited to the account of the party making the profit. In this way the accounts are maintained in a regular way till the delivery date.
It is truly difficult to learn ‘what is Nifty futures’ without having some hands on practical experience. Buying, selling, margin money, delivery, long and short are part of the terminology used in these futures trades.
Lot sizes in multiples of 50
Shares of a particular company can only in lot sizes of 50. That is one can buy or sell 50 shares and then 100 and 150. One cannot buy or sell 60 or 65 shares in a Nifty futures trade. The contract in Nifty futures can only be for a maximum of three months. The first month is called the near month, the second is called next month and the final third is called the far month.
Trading the Nifty
A safer method adopted by people who understand ‘what is Nifty futures‘ is to trade in the Nifty itself. The Nifty is a blend of the best 50 Indian businesses. It is safer to trade in them instead of buying individual shares and then keeping a track of their movements. This strategy has many advantages which include the following:-
• Relatively lower investment is required in trading Nifty futures.
• It is a volatile bag of companies which jump up and down in prices during the day. Therefore the Nifty as a package balances out extreme losses in some shares with profits from other shares.
• This strategy is less risky than holding on to stocks which are very fickle in nature.
• Instead of having to watch 50 stocks one needs to concentrate on the movement of the Nifty only.
• The Nifty can be bought and sold the same day thus allowing for great liquidity.
A great way to satisfy one’s curiosity regarding ‘what is Nifty futures’ is to keep a track of the daily movement of the Nifty index and the prices of its 50 constituent companies every day.