Equity Trading at Discount in Future Market

On last Thursday you asked me one good question related to future price. On That day I could not answer  your question properly. 

I realized it on this weekend that probably my ans was not up to the standard, because of my concentration on other work .
 
I have tried to ans your question as below in some logical way. I have taken example of three instruments ( Commodities, Index future and particular stock).
I hope this will be proper ans to your question. Please let me know if I have missed to cover any points. All the below given points are just based on my little knowledge and little experience, Please give your thought if you agree with my view.

Your question was that weather any particular stock is sold out at discount in Future market?

Basic View -- As we know that future is a derivative instrument which derive values from underlying instrument. And it is a mechanism to discover the equilibrium price in the market for the underlying instrument. Trader by investing in the derivative market try to earn super - normal profit. But as economics says that no person will be able to earn super-normal profit all the time if flow of information is very fast ( Theory of Market Efficiency).

that underlying instrument can be any thing ( Stock, Bond, Currency and commodities and now some fine art as well in some market).

Theoretically Future price can be in any direction either it can be traded at more than current market price or less than the current market price.

but again it depends on the certain economic factor as well as some behavioral  sentiment of the investor.

It also varies from one underlying instrument to other underlying instrument of the future trade.

As for example commodity - We normally see future traded at higher than current market price or lower than current market price, because normally trader and investors are able do find out the particular trend in the market by looking at the certain pattern and also they are able to analyze supply and demand in the market for the particular commodity.

For an example - Price of Metal, Gold or Silver (As we all know, that supply of these natural resources are in ltd). Investor or trader try to predict the market by looking at the historical pattern and they try to find out that if it is currently overvalued or undervalued in the short run market. And than they quote the price of the product in the future market ( As we know that economics says that in the long run every thing will come down to its potential value, or its  intrinsic value). It is also assumed that in the long run there will be equilibrium in the market.

For Agriculture product - for agriculture products, it is easy to determine the supply and demand of particular product in particular season ( As Aggregate supply and aggregate Demand of country). In India like country, where most of the agricultural production are based on the natural rains and other natural factors of production, So Investor or traders are able to identify that what will be the price of the product in future and they set price accordingly.

Conclusion - Based on the above explanation of commodity future, we can say that future price of commodity can be in either direction, But as per the human nature people want more and it give more satisfaction to human when they see price rising ( Even if, they make equal or more amount of profit at the time of price falling). So if we analyze the commodity future market we will find that difference between the no of time product is being sold out at premium or at discount will be less in agricultural product.

Index Future - As we know that index is the representation of any group of the underlying stock, and it is the Indication of momentum in all those underlying stocks as a whole ( Depending on the nature of index - Price weighted index, Equal Weighted Index and Market cap Index.)

In India we have market cap index for example, Sensex and Nifty.

As we also know that stock Index is assumed as Barometer of any economy. So that also reflect while pricing the Index in future market. For example, if, traders and investors are able to predict the GDP Growth rate of the National economy and International economy so that reflect in the pricing of Index future, Because it is assumed that both will go in similar direction. 

Also Pricing of Index future depends on the Industrial production in that period and the expenditure pattern in the economy. and of course, saving and investment rate plays a vital role while setting the price. 

Also trader try to find the particular trend in the market and while doing the technical analysis and above fundamental economic price.

So whenever any economic reform is announced by government (Keynesian Thought), in the market we see that future index price is traded at premium, We also see the impact of monetary policy on index future when RBI increases liquidity in market or decreases liquidity leval in economy ( Increase in CRR or decrease in CRR Modern economic thought).

Conclusion - 

Here also we can conclude that theoretically price of the Index future can be in either direction. But most of the market participants wants to earn the super normal profits so they always try to look for the positive sign so we see that most of the time Nifty future traded at premium. But yes there are situation when we see that Index future is traded at discount but % index future trading at discount will be less.


STOCK FUTURE ------- 

As per my understanding pricing of particular stock depends on many fundamental factors such as production leval of company, product life cyle of company, revenue growth rate of the company, ETC,,,,,,,,.

But question comes why should I invest in particular company stock. - I will invest by expecting good return from that company than its Peer groups. Or I expect that company will be able to generate Alpha for me. Or company has good potential of growth, Or company has good track record. Or many other reason.

Since Insider trading is not allowed, it is very difficult to price stock in the future market. 

As normally we see that company try to release positive news more faster and try to hide the negative news of the company.

Since positive news comes faster so particular companies stock is traded at premium in future market all most 90% of the time, ( By assuming that growth rate of the GDP is constant and industry out put is also constant).

In Intra-day it can be in either direction.

But again it varies from industry to industry  for example if particular company is in FMCG Industry or pharmaceutical industry price of the stock will be almost constant and growth rate of stock will be also constant. So we will never see any FMCG Stock traded at discount in future market.

If stock is of any real state company - it is seen that stock of that company is traded at discount , because it easy to predict the growth of the company.

If stock has more market can in the Index like Reliance industry. In that case future price of the stock will be almost near the future price of that index future.

Normally we see that Reliance and Sensex move in similar direction.

Conclusion - As a conclusion we can say that stock can be traded at discount in future market but chances of trading at discount is very less. Because normally people try to invest in those company where they can out - bit the market, and where they can earn the super - normal profit.

As flow of insider information is not fast so prediction is hard. 

At last I can say that every thing is possible in market, but probability is less of stock being traded at discount in future market.

God made the man, Man Made the Money and Money Made the man Mad.