Do you have any experience in trading futures? Maybe you’d like to learn more about the market, or maybe you just want to improve your future trading skills.
This guide to Futures Trading will teach you everything you need to know about the futures market.
Table of Contents
- What Is Futures Trading and How Does It Work?
- What are the Benefits of Trading Futures?
- Future Contract Settlement
- Most Common Questions
What Is Futures Trading and How Does It Work?
A futures contract is a deal between two parties to purchase or sell an asset at a specific price at some point in the future.
To summaries, one party offers to buy a certain asset at a certain price at a later date, while a second party agrees to sell the same asset bought at the agreed price and date.
This contracts may be made on any asset, such as stock, gold, crude oil, silver, natural gas etc or the price of a stock index like Nifty, Banknifty, and they must be made on a regulated futures market.
For example :
Let’s consider two parties. Party A and Party B.
A holds a view that a stock’s valuation will increase from its current level in the future, while B believes the opposite.
Now A and B sign a deal in which ‘A’ agrees to purchase stock from ‘B’ at the same price at some point in the future.
If A’s prediction is true, i.e., the stock price increases, A will purchase shares of the stock from B at a reduced price.
In the event that the share price falls, B will sell shares to A at a premium, or at a price higher than the market price.
A & B both parties can close their future position any time before expiry.
Points to Remember :
- A futures contract is a deal between two parties to execute a transaction at a fixed, locked-in price at a future date.
- As the stock price rises, the futures price rises, and when the stock price declines, the futures price falls.
- To buy or sell stock futures, one does not have to pay the whole premium. The term “margin” refers to the fact that only a portion of the total sum is required to be paid.
- This distinguishes futures trading from traditional cash market trading.
What are the Benefits of Trading Futures?
Leverage and Margins
Unlike buying stock, buying futures does not require full payment.
To buy or sell futures, one just has to pay a proportion of the overall contract value.
Margin percentage varies between different stock futures.
For the same sum of money, you might purchase or sell a lot more futures than equity.
Similarly, because of the leverage you are using, if the market moves in your favor, you will earn good gains at a much faster pace.
Hedging Your Position
Futures may be used to reduce or eliminate volatility associated with a particular stock or a portfolio of securities.
Hedging single stocks is simple: Sell futures at a higher price than the price at which the securities was purchased.
One must sell the same number of futures as he or she owns in equity stock.
As a result, if stocks fall, the benefit from selling stock futures offsets the drop in share value, and vice versa.
Futures may also be used to protect a stock portfolio’s interest from risk.
Future Contract Settlement
Deliverable vs. Cash-Settled future contracts and Physical vs. Non-Physical future contracts
This is important information, please pay attention.
When selling commodities, there are a few main differences to keep in mind.
Physical vs. non-physical commodities:
Certain commodities, such as gold, crude oil, agri commodities and metals, are physical.
Non-physical commodities include stock indices, treasuries, and shares.
Deliverable vs. Cash-Settled:
Similarly, certain goods are physically deliverable.
Commercial producers and sellers are the primary users of this process.
Other commodities, particularly stock indices, are cash-settled, which means you collect (or either pay) the cash equivalent of the future contract.
It’s important to keep in mind that just because some commodities are physical doesn’t mean it can be delivered.
While gold mini futures are deliverable, their micro-futures can be settled in cash.
You must exit by a certain date if you are trading deliverable goods, or you risk being delivered.
Your broker may alert you to square off your position before expiry.
Most Common Questions
How much money needed to trade futures in India?
Many people ask, How much funds do I need to trade futures?
Margin is used when trading futures contracts. The amount of margin would be determined by the value of the asset.
To position a deal, however, most brokers would need at least 10% upfront margin.
However, most brokers will ask up to 10 percent upfront margin to place buy/sell a future contract.
Can I sell futures before expiry?
A futures contract would not have to be held until its expiration date.
Many traders, in general, exit their contracts before the expiry date.
You will either sell or buy the future to square off your existing position.
How to trade in futures in India?
If you have trading account and F&O is activated in that account, you can trade futures anytime. You can trade futures in Equities and Commodities.
You can square off your future trade same day or you can hold it for few more days.
What Does it Mean to Rollover a Position?
Rollover refers to closing a position in an expiring month’s contract in order to open a new month’s contract.
There is no way to rollover a place automatically.
You’ll have to manually close the position you’re in and access the new one.
What is a Margin Call?
When your cash falls below the minimum margin requirement, a margin call given by your broker. In order to keep your existing future or commodity position, you need to fund your account again.
You can square off all or a portion of your positions in case of shortage of funds.
Furthermore, many brokers no longer issue “margin calls,” instead liquidating enough of your account to hold you over the necessary margin.
- Optimus Futures – https://optimusfutures.com/
- Upstox – https://upstox.com/learning-center/futures-and-options/benefits-of-trading-in-futures/