A futures contract, as the name suggests, is a contract for the future. It is traded on a futures exchange; an instrument/commodity is bought or sold in the future at a certain time designated in the future. The pre-set price is called the futures price, while the price of the asset on the date of delivery is known as the settlement price. Such a contract, unlike the options contract, confers on the trader a right AND obligation to buy or sell.
Trading Stocks & Index Futures in the Indian Stock Market:
A future trading is the world’s perfect business. This is because of the fact that apart from earning big, you can do futures trading whenever you want, wherever you are and whatever you are doing! You do not need huge capital or employees/attorneys/accountants etc. Also you will not be having “customers” or competition, nor will you have to work on office space, warehousing or a distribution system! All you need is a PC, and bingo! You are all set to enter the “future” arena!
Who trade futures?
Mortgage bankers, farmers, bond dealers, grain merchants, food processors, savings and loan associations, and individual spectators – anyone and everyone can and is trading futures! However, please note that the risk of any given transaction may result in loss. Also, before entering the arena, please equip yourself with all the risk management possibilities available, though we would like to inform you that such possibilities are no guarantees and may or may not prove effective.
What does Futures Trading apply to Indian Stocks & Indices?
A future trading is a form of investment that involves speculating on the price of a security, [that may be a stock (RIL, TISCO etc.), stock index (NSE, Nifty etc.), commodity (Gold, Silver, etc.) or currency (Pound, Dollar etc.) going up or down in the future. When you trade futures, you are merely speculating where the price of a particular security would be in the “future”. The terms ‘buy’ and ‘sell’ merely indicate the direction you expect future prices will take.
For example, you would buy a stock on the NSE Nifty if you expect prices to go up in the future. You would sell if you expect prices to go down. However, neither the buyer nor the trader has to own anything to participate. All either/both have to do is deposit sufficient capital with the brokerage firm so as to be able to pay for the losses, if any.
Settling Futures Contracts in India
Futures contract are usually not settled with physical delivery. Purchase or sale of an offsetting position is used to settle an existing position. The margin balance is, at this stage, returned to the hedger, along with any additional gains, or with profit as credit towards the holder’s loss. Cash settlement is used for contracts that cannot result in delivery.
What is the purpose of the delivery option? It is to simply ensure that goods are not available at two different prices, that is the futures price and the cash price, at the same time. This strategy is known as arbitrage.
To begin with, futures trading have high leverage. You can get huge profits in a short span of time. To become the owner of a futures contract, as margin put up a small fraction of the value of the contract, and if you have predicted the market correctly, your profits would be multiplied ten fold!
Secondly, futures trading guarantees profit irrespective of market condition. By choosing wisely, you can make money when the market is up or down.
Thirdly, there are relatively lower commissions or lower transaction cost. Commissions on individual stocks are not more than 1% – both buying and selling.
Lastly, futures trading market is highly liquid. Innumerable contracts are traded everyday! Market orders can be placed very quickly as there are always buyers and sellers for most contracts.