In India, there are multiple opportunities for traders to grow rich and one such medium is futures trading. The Future trading deals with Futures market which is built on Cash market and Forwards market. So before we talk about Futures trading, it’s benefits and to get started in it, we will also discuss the cash and forward markets.
The cash market is an equity market in India which shares of companies listed on the exchange are bought and sold. When trading on the cash market, the buyer of the company’s shares is essentially a part-owner of the company. When he or she purchases the company’s stock on the open market, he or she takes delivery of the shares. These are governed by exchanges. Anyway, we can only buy the number of shares that our trading account’s margin/capital allows. When trading in the cash market, there is no concept of leverage.
The forwards market is essentially a contract between two parties to purchase the underlying asset in the future at a specified price, in a specified quantity, and at a fixed price. These instruments have lost favor due to glaring limitations, but they are still used by banks and other financial institutions.
The futures market is a standardized contract with a fixed number of shares (in the case of the equity market) per lot and a fixed expiry period (three different expiry contracts run concurrently). They are similar to purchasing shares in the stock market, with the primary difference being that there is no delivery of the shares in the case of futures contracts.
Another significant distinction is the leverage available when trading futures contracts. In the cash market, the leverage is equal to the amount of margin in the trading account. However, when trading futures, the amount of margin required varies between 20-60% of the total contract value for shares and 10-12% of the total contract value for index futures. As a result, financial leverage becomes an important consideration for a futures trader. Another significant advantage of online trading with futures contracts is that they are regulated by an exchange (SEBI in India), and legality is never an issue with futures contracts.
Benefits of Futures trading:
Contracts are well regulated:
Because the futures market is well regulated, there is no risk of illegitimacy, and all contracts are settled at the time of expiry.
One of the most important reasons why futures trading is one of the most popular derivative instruments is leverage.
Because there are hordes of players willing to trade futures or hedge their existing position in the market, liquidity is never an issue when trading futures.
How to do Futures trading in India:
Futures trading in India is primarily divided into two types: stock futures and index futures. In India, all futures contracts have three contracts running at the same time: the near month, the middle month, and the far month. When a near month contract expires, a new far month contract is added. The monthly contracts are set to expire on the last working Thursday of each month. And if the last working Thursday is a holiday, it expires the day before.
Stock futures are a financial derivative instrument whose value is determined by the underlying asset’s value (shares of the company). The contracts have a set size, a set price, and a set deadline. Once the contract is signed, it must be followed through on. Stock futures have the following characteristics:
The contract size: Each lot of each stock trading in India on the futures market contains a different number of shares. Trading in fractional lots is not permitted. There must be a minimum of one lot traded.
Expiry: Each stock futures contract has a predetermined fixed maturity date. They are set to expire on the last trading Thursday of each month. If the last Thursday of the month is a holiday, they expire on the previous trading day. There are three expiring contracts for the stocks: near month (1-month), middle month (2-month), and far month (3-month) (3-month).
Margin: To cover for Mark to Market (M2M) losses, the margin required to trade stock futures contracts is very high. This is done primarily to safeguard the interest brokers and the exchange. And, due to the prevalence of margin in futures trading in India, there is no risk of default in trading via futures contracts. Margin is made up of two parts: exposure margin and SPAN margin. SPAN Margin refers to the minimum requisite margins required by the exchange, whereas ‘Exposure Margin’ refers to the margin required in addition to the SPAN to account for any MTM losses.
An index is a graphical representation of a specific sector of the economy. In India, two major indices are actively traded in the futures market: the Nifty Index and the Bank Nifty Index. SEBI also allowed trading of Nifty Financial services in the derivatives segment on January 12, 2021. If one were to express their views on the economy, they should do so by trading Index futures, which reflect the market’s overall sentiment. Trading Nifty futures implies expressing one’s views on the overall economy, as the Nifty 50 is made up of the top 50 companies listed on the NSE.
Over the years, futures trading has emerged as one of the favourite among the traders. This can be attributed to the fact that one can exit their existing futures contract position anytime and it has low Margin requirements. We at Tradeplus can provide traders with the perfect platform to carry out Futures trading.