Concept of Future Trading - Basics of Stock Market

Concept of Future Trading – Basics of Stock Market

Concept of Future Trading

Just like trading in the spot market trading in futures is also possible in the Indian stock market, but before moving ahead let’s clear some concept about it. Trading in futures is categorized under the head of Derivative trading.

The term Derivative means ” Derive from others” i.e A derivative is a product or contract which actually derives its value from its underlying asset.

Common derivative contracts available are Forwards, Futures, Options, & Swaps, Here we will look into a Futures contract.

Futures is a contract between two parties to buy & sell an asset at a certain time in the future at a certain price.

The derivatives trading started on 12 June 2000, NSE started its first derivative contract in Index Future, later on, option started on June 4 2001, in NSE. Currently, more than 160 plus companies are trading under derivative contracts along with Index contracts.

Important Terminologies of Future Contract:

Spot Price: Price at which underlying asset available in the spot market.

Future Price: Price at which future contract available in the future market.

Contract Cycle: It is defined as a time period for which a contract trades in the future market, Future contract is available in 3 months contract cycle period.

Lot Size: Defined as a standardized quantity of assets available for delivery at future date.

Expiry: Final day of settlement of a contract i.e last Thursday of the month.

Initial Margin: Amount which is required to deposit to purchase any future contract.

How to Trade in Future Market:

Trading in futures is as similar as trading in the cash market, the only difference is that in cash a trader needs to pay the full amount to purchase quantity & whereas in the future you need to deposit only a margin amount to purchase the same.

A trader then can hold the given quantity of futures up to expiry or can roll over for the next month, Once can rollover the contract up to 3 months

A trader is more beneficial in future trading as the initial investment requirement is less and returns are more.

For example, A trader who wish to purchase 1000 shares of XYZ ltd @price of 200 where the requirement is Rs 200,000 (1000*200) while in futures you need to deposit only a margin of Rs 25000/-

(Initial Margin 12.5% of the total value of the contract i.e 1000*200).

Benefits of Trading in Futures:

Low investment cost: In future trading, a trader needs to deposit only the margin amount required to be deposited with the broker.

More suitable for Speculators: Traders require fast money future contract is more suitable for them.

Possible to carry short position: One of the most important benefits of futures trading is that a trader can carry a short position, In cash short trading can be done only for intra-day, while in futures one can carry a short position up to expiry.

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