Lets say, I buy huge quantity of future contracts of a stock and as a result stock future price jumps +10% . Will actual stock price follow the future price? if yes, How does that work?
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If the futures price and the underlying price diverge, someone will come along and arbitrage it, and in doing so, will cause the prices to converge again.
For instance, let’s say the futures market is predicting that the price of a stock will be $100 in a month, and right now the stock is trading for $50. You could sell the futures contract (i.e. agree to sell the stock to someone for $100 in a month) and simultaneously buy the actual stock for $50. Then you don’t care what the price of the stock is in a month; either way you’re going to make $50, less whatever it costs you to hold on to the position for a month. As a side effect of you buying the stock, there will be upward pressure on the stock price, and as a side effect of you selling the futures contract, there will be downward pressure on the futures price. People will keep doing this until the prices are close enough together that the trade no longer makes sense.
The general concept of arbitrage is very important to the functioning of financial markets as a whole. Without arbitrage, ETFs and ADRs would not be possible either, as their pricing is kept in line with their underlying securities by the same mechanism.
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