For understanding of stock index futures a thorough knowledge of the composition of indexes is essential. Choosing the right index is important in choosing the right contract for speculation or hedging. Since for speculation, the volatility of the index is important whereas for hedging the choice of index depends upon the relationship between the stocks being hedged and the characteristics of the index
Choosing and understanding the right index is important as the movement of stocks index futures is quite similar to that of the underlying stock index. Volatility of the futures indexes is generally greater than spot stock indexes.
Every time an investor takes a long or short position on a stock, he also has an hidden exposure the Nifty or Sensex. As most often stock values fall in tune with the entire market sentiment and rise when the market as a whole is rising.
Retail investors will find the index derivatives useful due to the high correlation of the index with their portfolio / stock and low cost associated with using index futures for hedging.
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