What Is Futures Trading With Examples? Beginners Complete Guide 2021

  • Post last modified:July 29, 2021
  • Post category:Stock Market
  • Reading time:34 mins read
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In this post we will be understanding what is futures trading? How to trade futures with examples? as well as the basics and history of futures trading. It is a step by step guide for beginners to know everything related futures market.

However, before we learn about futures and how it is traded in stock market, one should have a basics understand on how futures came in to stock market. Therefore, this guide will start from the the basics to advanced covering the all the major aspects related to futures.

I would suggest you to read them step by step in order to gather the complete knowledge, however you can move from table of contents below to the desired topic as well.

 

History Of Futures Trading:

In last 35 years or so futures trading have become increasingly popular form of trading in stock market. Futures are now traded actively across different exchanges throughout the world. Futures are part of derivatives market, so let us first know the what is a derivative?

Derivative Definition:

A derivative can be defined as a financial instrument whose value depends upon (or derives from) the values of other, more basic, underlying asset(variables). This can be stocks, commodities, metals, currencies, bonds, stocks indices, etc.

A derivative can be based upon any variable, for example the price of any pulses, wheat or the snow falling at a particular place. With the time now, derivatives are traded even to the, insurance, electricity, weather etc.

‘Derivatives’ as mentioned earlier derives its value from some other thing, that can be any other thing whether stocks ,commodities, metals, currencies, bonds, stocks indices, etc.

So as we know the price of a stock like Amazon, Apple, MRF may rise or fall, commodities like gold, silver , crude oil may fluctuate, currency prices can also increase or decrease. These changes which happens everyday can help investors or traders to get benefited.

Derivatives are convenient way to speculate future price and garner the profits. But remember the speculation has to be done with proper technical and fundamental research. It should be backed by strong logic and rationale rather than mere speculation it.

We will understand more about the types of participants in derivative market late on.

 



 

History Of Derivatives:

It is been said in around 320-370 BC Kautilya’s Arthashastra (also known as Chanakya) which is ancient Indian Sanskrit treatise on statecraft, economic policy and military strategy. Kautilya described the pricing methodology of the existing crops which are ready to be harvested at sometime in future.

Seemingly this method of paying farmers in advance for their crops can be classified as the best mechanism and form of what we call it today as ‘Forward Contracts’.

If we talk about the modern era in India derivatives were introduced in the year 2000. The National Stock Exchange of India Limited (NSE) started trading in derivatives with the launch of index futures on June 12, 2000.

Futures on individual securities were introduced on November 9, 2001.

So, if we want to know about futures we first need to understand the simple form of derivative called as “forward contacts”.

Want to learn how to trade options check out this amazing guide.

 

What Is Forward Contracts?

Forward contract is an agreement to buy or sell an asset (i.e. stocks, metal, indices, bonds, currencies etc.) at a future time for a certain prices. On Contrary to spot contract, which is an agreement to buy and sell an asset today.

A forward contract is traded in the over the counter market(OTC) usually between two financial institutions or between a financial institution and one of its clients. Majorly its happens between banks and financial organization that to face to face.

In forwards contracts, one of the party can assume a long position and agrees to buy the underlying assets on certain specified future date for a certain specified price.

Whereas the other party assumes a short position and agrees to sell the asset on the same date for the same price which they agreed upon.

Forwards market is not for normal retail traders or investors. Big Institutions or bank does such trading in market. The only reason we are trying to understand is to get basic knowledge about futures market which evolved from forwards.

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Forward contracts Example:

Suppose there is a farmer by name ABC, and a distributor who buys the crop from different farmers in a area. In summer season in India, Maize, paddy, and cotton which are Kharif crops grow mostly between June to September.

The distributor asked the farmer about the prices of the crops he will be going to sell after the summer season. Farmer after his calculation of different expenses and cost told the distributor about the price of 1 Quintal (100kg) of cotton to bet set at Rs. 2600.

Distributor used his own logic and rationale (expected rain, market condition etc.) and said, how about Rs.2550 a quintal. As this is the current price of the cotton on the market, farmer easily got persuaded with the offer and agreed to sell this season crop to the distributor at Rs.2550 after 3 month.

Now this type of contract where two parties are agreeing to buy and sell at a particular date on a predefined price is called as forwards contract.

What Is The Logic Behind Forward Contracts?

If we see the thought process or logic of both farmer and the distributor it can be segregated easily:

Farmer might be expecting heavy or less rain, impacting the crops quantity, if he can sell the crop at much better price than what he calculated, chances of profits are more. As he was getting the crops at the reasonable prices which is currently in the market he agreed to the offer made by the distributor.

On the other hand distributor may have thought there is shortage of demand and supply in the market currently and cotton prices in the upcoming months may rise to high price. Another point can be of festive season in the forthcoming months.

Whatever reason they both have now, it has been decided after three months farmer will sell cotton to the distributor at Rs.2550.

Pay-off Structure of Forward Contracts:

There can be only three possible outcome of the deal:

Crops price go higher after 3 months

Crops price go lower after 3 months

There are no change in the crops prices

If the crops prices go higher after 3 months than farmer will be at loss, as he may have sold it in market at much better price than what he agreed upon.

If the crops prices falls, than farmer will be in benefit but the distributor will have a loss as he can buy the same crops at much lower price from the market.

Incase the prices of the crops remain the same than neither the farmer or the distributor will have any benefit from the agreement.

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Settlement Of Forward Contracts:

In forward contract settlement of the agreement can be done in two ways:

Physical Settlement: In this kind of settlement farmer has to give the crops in physical form to the distributor.

Cash Settlement: In this of settlement both can agree to simply exchange the cash difference. It would be much easier for both as they can just have cash differential amount and no need to carry the crops.

For example: Suppose the crops price gone higher to say Rs.3000 per quintal, So instead of giving a quintal of crops the farmer can simply ask for paying Rs.4050 on a quintal. (3000-2550)

The reason i am discussing all this is because it will lay a strong foundation for you to understand futures and derivatives market easily. So when will discuss the futures trading later in the post, you should be aware of different terms i have used and there is no room for confusion at all.

Now that you know what is forward contracts, how forward contract works, have you noticed what kind of risk is involved in such type of trade. Let us know them one by one:

Liquidity Risk:

Above example was made with intention to just explain the forward contracts in simple terms, in real life scenario this does not happen like this. First of all you won’t find someone with just contrary point of view about any assets or products with this ease.

As said above forward contract are majorly done by the investment banks or institutions finding a counterparty of a trade to occur is hard. These bank will look for parties in market and than discuss with them about the offer.

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Counterparty Risk:

Default risk or counterparty risk can happen when any of the two parties agreed does not ready to pay up on what they agreed upon. As in above case if the prices of the crops go down and distributor does not agree or default.

Regulatory Risk:

As forward contracts are not regulated by any market regulators such as SEBI (Securities and Exchange Board of India) in case of other financial markets, risk of not following laws can be easily done. As the agreement is done on the mutual consent with no regulator anyone can default at any given time.

That is why forward contracts are not so popular among retail traders and investors, Hence Forwards has been replaced by Futures Contract with time. It also gives better operational background. Moreover Futures are traded in stock market which is very liquid and trades can happen in mini seconds.

Hope you now have the basic understanding of what derivatives are and how forwards contracts came to existence, let us now move on to understand about the futures trading.

 

What Is Futures Trading Means?

Similar to forwards contract, futures contract  are agreement to buy or sell an asset at a future time for a certain price. Future contract are traded on an organized exchange and the contract terms are standardized by the exchange (NSE, BSE, MCX) itself.

Future contracts are now traded actively across all over the world. It’s also known as a derivative because futures contracts derive their value from an underlying asset.

The future agreement is based on the ‘future price’ of the asset. Asset can be stock, commodities, bond, indexes etc. “Futures contract” and “futures” refer to the same thing.

The futures price imitate the asset, which is also called the underlying. For example GOLD as an asset can have a ‘Gold Futures’ contract.

Whatever the underlying does the future contract will mimic the same, so if the price of the underlying asset is increasing the price of the futures contract will increase.

What i mean is, if the spot price of any particular asset in market, as an example crude oil is increasing or for that matter a stock is increasing, then the value of the futures contract of that particular asset will also increase and vice versa.

As a trader you should gave a directional view of the market to get benefited from trading futures. So, If the price of a futures contract increases the buyer get benefited. Similarly seller makes profit in case price of a futures contract price decreases.

 



 

Basics difference between forward and futures contracts:

 

What Is Futures Trading With Examples? Beginners Complete Guide 2020

 

 



 

Futures Contract Example:

Let us take an hypothetical situation, wherein farmer decided to grow rice on his land. Generally, every year he produces 20 Quintals (2000KG) of rice, however he is worried if the season is terrible and the supply of Rice falls, he might need to bear the losses. So, he decided to look for a party to do an agreement for future.

The farmer could either grow the rice and then sell it for whatever the price is in market when he harvest it, or he could fix a price now by selling a futures contract. Which will obligates the farmer to sell Quintals (2000KG) of rice after harvest for a fixed price.

By fixing the price now, farmer  is eliminating the risk of falling rice prices in future. However he need to find someone who is ready for such type of agreement.

A local restaurant owner decided instead of buying it from market, if he can directly buy from farmer the cost would be lesser. Now they both can go through an agreement with specific quantity & certain date of expiry. The market price of rice at that time could be very different than the current price .

It can be risky for both under different circumstances. If the prices of rice go up in future, restaurant owner need to pay fix amount as per contract and this will benefit him. On the other hand, farmer can get benefited if the prices stoop low from the current market price.

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Having said that here is the real thing:

What if farmer after much searching not able to find any counterparty for the agreement? As i mentioned above is hypothetical case for explanation. If there will be no buyer than agreement cannot happen.

Moreover it will take much time and effort to look for the counterparty.

That is why there is need of a place called as Exchange. An Exchange is a place where different parties with different views can buy or sell various securities easily.

Just like normal markets from where you buy (as consumer) and sell (as manufacturer, distributor etc.) For financial products like stocks, bonds, commodities, currencies, derivatives, and so on there is a place which is known as Stock exchange.

It helps all kind of investors and traders to participate in different financial products as per their choice.

 

National Stock Exchange of India(NSE) and BSE Ltd. both deals in this segment of market mentioned below.

 

Now than you now in theory about the futures market, before jumping to understand in practicality you should be well aware of some jargons or terminologies used in futures trades.

Let us know them one by one:

Lot Size:

In futures trades the minimum number or quantity one should transact the trade, is known as lot size. Lot size depends on different securities and are predetermined. You can not choose it by yourself how many shares you want to buy in a futures contract.

 

Futures Contract Example

 

As you can see in the image above market lot quantity for SBI Futures contract is 3000. This is the minimum quantity you need to buy in order to get the futures contract for this particular stock .

Similarly, if you are trading in any index such as Nifty or Bank Nifty, they have minimum lot size of 25 and 75.

Contract Value:

Lot Size x Price = Total Contract Value, as in above case SBI lot size was 3000 multiply by 184.75 = Total contract value of the futures Rs.5,54,250.

Expiry:

In the image above you can see expiry date showing July 30, 2020, this will the date when the contract will expire and you have to either close your position before and do the settlement of the agreement. Basically, futures contracts are time bound and it ranges for up to 3 months i.e the near month(1), the next month(2), and the far month(3).

So, if you purchase the contract for month of July after 30 it will get expired. Expiry happens on last Thursday of every month after this new contracts will get introduced by exchanges automatically.

Margin:

Margin is the minimum amount need to be deposited for purchasing a futures contracts. It is certain % of the total contract value, you need to be deposit it to your broker.

It’s different for every stock, index you can know the minimum margin need to be deposited to trade a futures contract by calling to your broker or it might be mentioned on there website as well. 

For example:

In futures and options fyers offer different leverage depending upon the stock, however, its up to 18X time for stock and for index like nifty its 33X times and bank-nifty its 20x times check out the image below i have calculated it from their margin calculator.

 

Fyers Margin In Futures 

 

As you can see in above image SPAN + Exposure margins for 1 lot of Nifty futures or option, currently trading at 9987 is ₹1,41000(approx.).

A leverage (margin) of 6.5 times means that you will be able to take a position with just ₹22470 (22,470*6.3= 1,41,561). Similarly for bank-nifty and stocks.

To understand it better let me show you how margin works in futures trade:

  1. At the time of initiating the futures position, margins are blocked in your trading account
  2. The margins that get blocked is also called the “Initial Margin”
  3. The initial margin is made up of two components i.e. SPAN margin and the Exposure Margin
  4. Initial Margin = SPAN Margin + Exposure Margin
  5. Initial Margin will be blocked in your trading account for how many ever days you choose to hold the futures trade, The value of initial margin varies daily as it depends on the futures price of the stock or index you are holding.

Want to know more about Nifty and Nifty Index Click Here.

Instrument Type:

As you can see the image below, I have chosen instrument type as Index Futures. If you want to trade in stocks futures select the stock derivatives (orange) and then in instrument type choose the stock.

 

What Is Futures Trading Means?

 

This data is easily available on NSE, i.e. exchange website click here to check.

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Symbol:

This tells you about the name of the stocks or index as in above case i have selected Bank Nifty Index.

Underlying Value:

This is current market price at which stock or index is trading in spot market. Spot market is the regular equity market, you might see the price difference in spot market and futures contracts price.

You might ask why is there difference in prices? Spot prices are for immediate buying and selling, while futures contracts delay payment and delivery.

However the difference is very little so it does not affect, the futures contract will mimic the underlying asset value which is currently showing in spot market.

What I mean is if Tata motors current spot price in market is Rs.100, than the future contract of the same may be around Rs.100.50 or nearby.

So, friends this were the basics thing you should be aware before making any trades in futures. Now you might have question in your mind, how do I trade futures? To answer this let us go through a real example.

 



 

How To Trade Futures In Stock Market?

Let us first know different types of futures products in India:

  1. Equity Index Futures
  2. Single Stock Futures
  3. Commodity Futures
  4. Currency Futures
  5. Interest Rate Futures

Out of this, the market in the interest rate futures is not very active in India. Whereas, Commodity and Index futures is the most active.

Let us know see the types of traders in futures market:

Hedgers:

Hedging helps to reduce the risk of adverse price fluctuations in an asset. A hedge can be made from various financial instruments, including stocks, insurance, forward contracts, swaps, options, futures contracts.

Hedging in a way helps you to protect your trading positions from making a loss. Hedging is a Skill to safeguard your position in the market, so it does not get affected by any adverse movements. To get a better understanding let us consider a situation:

Suppose you are the owner of a stock, let say INFOSYS, when I say owner, i mean you own that stock in your demat account, you have the shares allotted to the demat account. Click here to know more about demat account.

At present that stock is trading at Rs. 800, however due to some specific events happened in management and pressure from the global markets , Infosys failed to give good quarterly results.

Now this event lead the price of stock to fall. Next day stock plunged to Rs. 650 which is about 19% down in share value as well as your holding position.

Now in these situation considering the above example what you can do?

  • No action as you believe stock will eventually bounce back
  • Sell the stock & buy it back later at a lower price or can average the stocks by buying more at this levels
  • Hedge the position

What one exactly want to do while hedging is minimizing the risk in market. Whenever you buy any stock you have exposed yourself in market. There are many types of risks in market, I think it a good idea you should be aware of such risk.

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There are 2 main risks involved while trading & Investing

Systematic Risk:

This kind of Risk is standard to all stocks. These are commonly the macroeconomic risks & leave its impact in whole market. Reduction in GDP, Geo political risk like War, Higher Interest rate, Higher Inflation, Fiscal deficit etc.

Non-Systematic Risk:

This type of risk include dramatic events such as a strike, plunging revenues of a company, Higher financing cost, Declining profit margins, a natural disaster such as a fire, or something as simple as Management misconduct or slumping sales. Two common sources of unsystematic risk are business risk and financial risk.

However non-systematic risk can be diversified, So instead of investing all your money in one company, you can choose to diversify and invest in 3-4 different companies ideally from different sectors. When you do so, unsystematic risk is significantly reduced.

I think this was important to tell you before telling you how to hedge your position through Futures.

Let us see how you can hedge your position if you have bought stock from spot market by making a counter position in the futures market.

Suppose for instance you bought 1200 shares of  Infosys at Rs.800. Now, the total investment made is about Rs. 1200*800 = Rs. 9,60,000

As we have discussed above about the non-systematic risk, Infosys facing the same concern, Due to which the stock price may decline to a notably large extent. In order to avoid making loss you decided to hedge the position .

As our position in Infosys were Long earlier to hedge we have to short in Futures.

Short futures trade we need to make

Short Futures @ 800/-

Lot size = 1200

Contract Value = Rs.9.60,000/-

Now regardless of what price movement happens in spot price, the position will remain Intact.

What i t means is the overall position of stock would be frozen.

Remember this, in order to hedge stocks one must have the same number of shares as that of the lot size. Otherwise the position will either be under hedged or over hedged. The stock P/L will look like this :

Random Price of Infy
Stock P&L
Short Futures P&L
Net P&L
850
850 – 800 = +50
800 – 850 = -50
+50 -50 = 0
680
680 – 800 = -120
800 – 680 = +120
-120 +120  = 0
500
500 – 800 = -300
800 – 500 = +300
+300 – 300 = 0

As you see the overall impact on Profit & Loss is same. One more thing to consider here, you cannot hedge small positions whose value is Comparatively lower than the contract value of futures stock.

It is because the lot size for futures should match at-least the spot total value of a stock. However you can hedge such positions by employing options contracts.

You can short more quantity if you are sure about the downfall, that will help you first at hedging your open position, secondly you can garner some profit from the fall as well.

You may be thinking than what will be the purpose if i just hedge the position as the P&L is same. See, you can drop your holding and exit the position for both holding & shorts and can go long(buy) once the fall is stopped in the stock prices.

That way you have saved your capital to be eroded without doing anything.

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Speculator:

Whereas the hedgers want to avoid exposure to the adverse movements in the price of an asset, speculators  wish to take a position in the market. Either they are betting that the price of the assets will go up or they are betting that it will go down.

What i mean is they are simply speculating, it may be they have done enough research and have their own rational logics behind there speculations or it is simply a speculation not backed by any such logics.

Retail trader are mostly find in such category of traders .

Arbitrageurs:

Arbitrageurs are a third important group of participants in futures, forwards or option markets. Arbitrage involves locking in a riskless profit by simultaneously entering into transactions in two or more markets.

As i mentioned above the there is some difference in the spot price of the stock and the futures prices, arbitrageurs take benefit of this. So a arbitrage could simply buy shares of any stocks or futures in one exchange, let say NSE  and then sell it to other exchange such as BSE (Bombay stock exchange).

However, retail traders are not involve in such trades as the transaction cost would eliminate the profit. However, a large investment bank faces very low transaction cost in both the stock market and foreign exchange markets. It would find the arbitrage opportunity and can take advantage of it as much as possible.

Having said that there are very less chances of price disparity in any financial market in world, hence there are very low chances of such events.

As a retail trader we should not be bother about this, this are just goof to know info. Now that we know the types of traders exist in futures market let us understand how you can trade in futures with an live example.

 



 

Example Of Futures Trading:

Always remember as a futures trader you should have a directional view of the assets you are thinking to trade. Which means if your view about a stock or index is positive and you think based on your research that in upcoming days the price of that asset will increase you should go long (buy).

On the other hand if your view is bearish about the assets you can short futures. Another important thing i forgot to tell you above, Why one would trade in futures at all, I mean instead of buying the futures contract you can simply buy that stock and hold the shares in your demat and can sell whenever you want.

Reason is simple, Margin required to buy or sell futures contract is very less compared to buying a stock and keeping it in your demat.

For ex- Suppose you want to buy ICICI Bank currently trading at Rs.360 per share, the lot size in futures contract for ICICI is 1375, if you simply buy the stock and keep it in your demat account you need to pay 1375* 360= Rs. 4,95,000

Whereas if you just buy the futures contract you need to pay much lesser than that.

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How much money do you need to trade futures?

In Below image, I have calculated the ICICI Futures contract margin required for carryover position from Zerodha margin calculator. Looking to open any trading or demat account than you should check moneycontain broker review guide here.

Mind it it’s not intraday position, you can keep it overnight till the contract is not expired.

 

Example Of Futures Trades

 

Moreover you can short in equity on intraday basis but there is no such thing as shorting and keeping it in your demat. You cannot carry forward the short position for multiple days.

Whereas in futures if your view is bearish you can short the futures contract and keep it till you contract ends.

I know its a very minor thing but sometime for a beginner can be really important. For intraday position the margin will be much lesser if you are placing Cover order or bracket order.

Coming back to how you can trade futures, let me illustrate this with an example. Suppose, you came to know about ICICI bank is looking to open 50 new branches in tier 2 cities in India in few days.

Moreover, you also did some technical analysis of ICICI BANK to check where it currently stand.

Based on your research and analysis you are thinking to go long on ICICI BANK, to do this you need to buy this month futures contract.

Below image is an order window i have taken from my personal zerodha account.

 

How To Trade Futures?

 

You can easily see the margin required to take the position for ICICI bank, If you are not aware about the different types of orders in stock market than you should read this post explaining in detail.

As you can see the lot size is already mentioned the moment you click on up arrow it will just double the lot size to 2750 so on and so forth.

You can put the price of the stock on which you want to buy and incase you feel if the deal does not go through, the price of stock can fall, you can also put the stop-loss in the order window to limit your losses.

There is no rocket science involved, it is similar to equity segment, just that you are not owning any stocks.

Means in futures you are not creating wealth, it is just the transfer of money from one party to another or from buyer to a seller, basically futures trading is a zero sum game.

Likewise you can short any futures contract of other stocks and index such as NIFTY, BANK NIFTY.

Now will assume that all your efforts from good research resulted positively and the ICICI BANK did went high. Suppose after 15 days the stock went up to Rs.400 per share. You can easily calculate the profit from the contract.

1375*39= Rs.53,625

Can you imagine, the profit by investing just about 1.62 lacs in few days, if we compare it with buying the stock and keeping in demat, there you have to pay Approx. 5 lakhs.

If we calculate this return in terms of percentage:

Stocks bought kept in demat = 53625/495000*100 = 10% Approx.

Futures contract bought = 53625/1,62000*100 = 33% approx.

That is why in derivatives whether futures or options most of the trading happens in comparison to equity segment. Almost 70-80% of overall trading on NSE and BSE happens in FNO, rest happens in other segment such as equity.

The futures agreement is tradable which means, at any point after entering into a futures agreement you can easily get out of the agreement by transferring the agreement to someone else. This means you can close the existing ICICI BANK futures position and book a profit of Rs.53,625/-

Closing an existing futures position is called “square off”. By squaring off, you offset an existing open position. You just need to login to your trading terminal given to buy your broker and check your open position, just click on squareoff to exit the trade.

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The profit and loss statement can be easily seen from the back office software of the broker telling you about the taxes and brokerage charged in total and the total absolute profit after those charges. So this is how to make money in futures trading.

 



 

How Futures Trades Get Settled?

Before October 2019, settlement in stock derivatives, i mean stock option or stock futures were used to happen through cash only. So suppose you hold a stock futures contract and you forgot to square-off your position before the expiry, in that case you have to settle the position by giving the remaining money.

That means upon expiry of the contract, buyers or sellers settle their position in cash without taking delivery of the underlying(stock).

However from October 2019, SEBI bought this circular after which,  if you trading in stocks derivatives, as an trader if you don’t close or rollover your position till expiry date, than you will be required to pay the remaining amount upon delivery of shares to your demat account as part of the settlement.

Let me explain this through an example:

Physical Settlement In Stock Futures from October 2019:

As a trader if you initiate a long (buy) trade on a security and you forget or did not closed your contract till expiry, than you have to compulsorily take delivery of shares against your derivative position. Hence need to pay the full contract value (value of underlying at settlement*lot size*no. of lots).

So let say you bought ICICI BANK future contract, at the end of the expiry the value of underlying means the spot price of the stock is trading at Rs.350 * 1375(lots)* no. of lots you bought = Rs. 4,81,250

In Case of selling stock futures if the position is not covered or rolled over till expiry, than you have to give delivery of shares. In above case of ICICI  you have to deliver 1375 shares.

Suppose you sell any stock on T(trading) day, you are obligated to deliver the shares on T+2. However it may happen that you sell some stocks but these stocks are not present in your demat account and hence you would not be able to give delivery of these stocks on T+2 and you would end up defaulting.

This default is called “Short Delivery“. If a trader doesn’t own 1375 shares, he will have to pay the penalty by participating in the auction where he’ll have to purchase the shares from the market at a price higher than the current market price. This can be as much as 20% or more.

That is why it becomes very important to close your contract before expiry. Any Which ways after this circular brought by the SEBI, brokers aren’t allowing retail clients to take any position in stock derivatives in the expiry week to avoid any default until full margin is available.

If you don’t want your positions to be squared off, you will have to maintain an account balance which is equal to or more than the contract value of the derivative positions. Hence, it is advisable for a client to square off all positions on your own before expiry.

Incase of Index such as nifty and BankNifty there is no such provision and it is still done through cash. So no physical settlement happens in Indexes.

 



 

Why trade in Futures?

Time duration, as you can buy it anytime and sell it anytime before expiry, or even the very next hour, day. You can buy contract for 1, 2 or 3 months as well.

Margin benefit ,You did not need to have the full amount as in case of delivery of a stock. Because futures contracts can be purchased on margin, meaning that the investor can buy a contract with a partial amount from your broker.

Traders have an incredible amount of leverage with which they can trade much higher worth of contracts with very little of his own money.

Minimum amount required for future trading in India is as low as the lot size and price of the asset.

You can hedge positions by making a counter position in the futures market.

Open Best Trading/Demat/Mutual Fund account online within minutes and start investing and trading in stocks, FNO, Commodity, Currency, ETF, SGB, IPO, Gold and many more Products..

 

Things to Know Before Making Futures Trades:

Futures contracts require daily settlement. In case if the futures contract bought on margin is out of the money on an any given day, the contract holder must settle the shortfall of money that day. As prices of any underlying asset can move up or down significantly within a day.

Suppose due to some event the price of the assets fall to extreme levels, which is much more than the required margin in your trading account, either your broker will call you to deposit more money or will exit your open position. This is called maintenance margin.

The money that you make through profit or lose gets credited or debited to your trading account the same day.

You can exit the contract anytime, which means you can exit the contract within seconds of entering in it.

The margins amount are blocked the moment you enter a futures trade on exchange.

The final profit or loss of the trade is realized when the trade is closed by exiting the contract.

Futures positions are settled on a daily basis, it means that gains or losses are calculated each day. It gets added or subtracted from a contract holder’s trading account.

Trading in futures requires a directional view of the market. whether you are trading stocks indexes or any other securities .

Futures are highly leveraged investments. The trader typically only needs to put up 10%-15% of the value of the underlying asset as margin. Thus, you can trade larger amounts with less money.

Square-off your position or roll-over it to next month contract in case of stock futures before expiry of your contract to avoid the physical settlement of the contract or get ready for penalty in case you do not own stock but have placed the shorts.

Open Best Trading/Demat/Mutual Fund account online within minutes and start investing and trading in stocks, FNO, Commodity, Currency, ETF, SGB, IPO, Gold and many more Products..

 

Which Futures Trading Platform Is Best?

I would suggest you to have your futures trades to be with best broker in India. Below is the list of brokers who have best trading platform for any segments in markets such as equities, Futures and option, commodities, currencies and even mutual funds.

Upstox

Zerodha

5Paisa

Fyers

You can read my guide about the best trading platform in India here for more information. You can also check the reviews of these stock brokers here.

 



 

Conclusion:

Trading in derivatives market such as futures and options can be a good source of income for a trader, besides this the margin required to take position are very low on intraday basis.

Having said that, one should always do proper research before taking any trades, futures because of being highly leverage products the risk also increases.

Always go with more liquid contract in case of stocks futures. The more liquid a stock is, chances of buying and selling the contracts instantly become high. Indexes are already very liquid by nature so you do not need to worry about that.

Please do not just speculate while trading in stock market in any segment, instead look for learning new strategies based on different technical tools and indicators.

I hope you have thoroughly understood What Is Futures Trading, the basics concepts related to derivatives market and futures trading. The post might seem to you very long, but trust me i have tried my best to keep it short and crisp without excluding any major points.

If your looking to invest in mutual funds through SIP than you should checkout moneycontain Monthly SIP return Calculator with inflation HERE. 

If you are a beginner in trading and investing, please read this amazing guide on how share market works in India?

If, you have liked the content please do share it with your friends or on social media, as sharing do bring the good karma. If you have any questions or feedback you can leave them in comment box below.

Note: Please do your own research and make investment. Moneycontain will not be responsible for any of your losses at all. The point made is for educational purpose only and intended to give information. All investments are subject to risks, which should be considered prior to making any investments.

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