Insights

Futures – FAQs

May 16, 2023 . Equities Desk

Futures are derivative contracts that derive their price from the underlying assets. These contracts have predetermined pricing that is known up front as well as expiration dates. 

Why trade in Futures?

  • Futures are very liquid
  • Executions costs are low
  • Traders can take a position by paying only the nominal margin
  • Futures are great for diversification or hedging

How do Futures work?

To understand futures trading basics, let’s take an example. You have purchased 1000 shares of ABC stock futures for Rs 1000, which expire on May 25. The margin amount has been paid and the order has been placed with the broker. Let us assume that ABC stock is anticipated to be trading for Rs.1100 on May 25. Now, you can exercise the contract by selling 1000 shares at Rs 1100 and making a profit of Rs 100 on each share (profit: 1000 * 100 = Rs.1,00,000). The profit will be calculated after subtracting the margin paid. Your profit will be deposited in your account after deducting brokerage & other charges. In case of loss, the amount will be deducted from your account. Your gains and losses are determined after being adjusted for the margins you have paid when you settle before the expiration date. 

Frequently Asked Questions about Future Trading

What are Futures?

Futures are derivative financial contracts that obligate either the buyer or the seller to buy or sell a particular asset at a specific price and future date. An investor can logically speculate on the price of a financial product or commodity by using futures contracts.

A legally binding contract to purchase or sell the underlying securities at a later time is known as a futures contract. Future contracts are standardized agreements that cover quantity, quality (in the case of goods), delivery location, and settlement on any future date. The agreement ends on a predetermined expiration date. Futures can be settled by delivery of the underlying asset or cash when they expire. 

What are the types of Futures contracts? 

Futures are divided broadly into

  • Stock futures – Stock futures contracts are futures whose underlying asset is based on stocks. Example: Infosys, HDFC etc 
  • Index futures – Index futures contracts are futures whose underlying asset is based on index. Example: NIFTY Index and the Nifty Bank Index. 
  • Currency futures –  These contracts are futures whose underlying asset is a currency.
  • Commodity Futures – In this type of futures, the underlying asset is a commodity like gold, silver, crude oil etc. 
  • Interest rate futures – This is a type of future whose underlying assets are debt instruments like T-bills, government bonds etc. 

Which stocks are allowed for future contracts through FundsIndia?

We currently allow trading in all future contracts which are available in the exchange. Precisely, Exchange is now allowing future contracts in 180+ underlying equity stocks

What is long and short in the future?

If you have a “long” (buy) position in a security, you effectively own that security. Investors hold “long” holdings in securities because they believe the stock will increase in value in the future. A “short” position is the antithesis of a “long” position on the issue. Investors with short positions owe those futures to someone. 

How are future contracts settled?

Future contracts are usually settled in cash This involves settling the difference between the contract price and the closing price of the underlying asset in cash. For instance, if you purchase a futures contract at a price of Rs.400/share and the closing price is higher than the contract price, say, Rs. 410/share, you will receive a cash payment equivalent to the difference. On the other hand, if the settlement price is lower than the contract price, you will be required to pay the difference in cash.

When can I trade in Futures?

Futures trading is available online around the clock. For Indian Investors, the trading window for futures is the same as the market hours.

How are Futures traded?

Futures are usually traded in lots. You can only buy and sell these items in minimum lots or multiples of the lot size when trading futures. For example, one lot of ABC futures contract might contain 1000 shares. 

How much funds do I need to trade in Futures?

For any trading in Futures, investors should pay the margin payment. This margin payment depends on the lot size of the futures. According to the regulations of the Exchanges, traders will be required to pay a margin ranging from 10% to 50% of the contract price.

How to profit from Futures trading?

Like all investment instruments, futures are also subject to market risks. Profits from futures are purely dependent on the speculations of price fluctuations by the investors. Minor changes in the market can also impact the profit and losses of the investors

What is the expiry in a futures contract?

The last Thursday of the month is the last day to trade futures contracts.A futures contract is no longer valid once the expiration date has passed.

What is the contract availability?

Three-month contracts are always available for trade. For example, if a contract in May expires, then the next contract for June to August will be available. 

What is M2M? How are they calculated?

Mark to market, often known as M2M, is an accounting method where daily gains and losses are totaled, settled, and recorded in the account. 

For instance, let’s assume that on April 1st, you chose to buy a lot of 2000 stocks of company XYC futures at a price of Rs. 100. You made the decision to sell the contract on the third day for Rs. 110. This trade is now profitable with a profit of Rs.10 for each share and Rs. 20,000 (Rs.10*2000) for the entire transaction.

 In this case, the futures contract was held for three days. The stock saw gains and losses every day. This gain or loss is tracked with M2M. 

Lets say, that the stock closed at Rs. 105 per share on the first day. That amounts to an Rs. 5 profit per share. The profit for the entire lot is Rs. 10,000 (Rs.5*2000). Here, the stock exchange will ensure that Rs.10,000 reaches your account by the end of the day through a broker.

But where does this money come from?

The counterparty is where the money is from. In this approach, the stock exchange assures that the opposite party gets debited Rs. 10,000 to cover their loss in accordance with M2M.

 In the same way, money will be taken from you and credited to the counterparty if the stock price closes at a loss the next day. 

How to start trading in futures?

For buying and selling of futures, all you need is a trading account. Start your futures trading with FundsIndia today and start building your wealth.

All you have to do is, open your equity account with FundsIndia. Upon activation of your account, navigate to your equity dashboard,  on the “profile” page, enable the “NSE FO” option, and accept the Terms and Conditions.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.