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The No-Nonsense Guide to Futures Trading For Beginners


Futures can be explained as derivative contracts, whose value depends on underlying assets (which can be stock, commodity, currency etc.). Trading in futures segment is quiet different than trading in cash segment. So, in this post we will be learning the basics of futures trading in a simple and to the point manner just keep reading......

1) Standardized Contracts: In cash segment you can buy any number of shares whereas in case of futures you need to buy a contract which consists of specific number of shares. How many shares a single contract will consist. varies from stock to stock (we can check it on nse website). Thus, we can say that buying shares is customized while the buying in futures is standardized.

For example, in case of cash segment you can buy any number of share of Infosys but if you wish to buy Infosys one month future contact, you need to buy at least 250 shares to buy one lot of future contract as the lot size determined by exchange for it is 250.

Similarly, if you wish to buy one lot of future contact of Tata Steel you need to buy at least one thousand share. This lot size varies from stock to stock you can change the same on nse website and another thing not all stocks are traded in futures segment only selected stock which fulfill criteria set by exchange are allowed to trade in this segment. Download this file to know the various stocks traded in this segment

2) Payment of margin amount to buy Future: For example you want to buy a month contact of Infosys, the market price of Infosys is say, Rs. 1000 and lot size is 250, then the total value of the contract becomes Rs. 1000X250= Rs. 2,50,0000.

Here you won't be paying entire Rs. 2,50,000 rather you will be paying certain percentage of total value as specified by the exchange in order to buy the contract, this is called the margin percentage or margin amount. Let us say this is 10% then you will be paying 10% of total value i.e. 10% of 2,50,000= Rs. 25,000.

How to Buy Futures Contracts By Kotak Securities®
Image Credits: Kotak Securites
So, here you pay Rs. 25,000 to buy one lot of futures contract of Infosys. The margin percentage varies from stock to stock. Whereas, in order to buy 250 shares in cash market you have to pay full amount which in our case was Rs. 2,50,000

3) Risk-Return Analysis- Let's assume you buy one lot of Infosys future when the price is Rs. 1000 a day later you find that price has increased to Rs. 1020. So, your gain is Rs. 20 per share on 250 shares. Thus, the total of Rs. 20X250= Rs. 5,000 will be credited to your account.

In same way if the price falls down from Rs. 1000 to Rs. 980 the loss of Rs. 20X250= Rs. 5000 will be debited from your account.

This money adjustment with respect to gains or losses take place in your account on a daily basis and the process goes on till the expiry of the contract, which is last Thursday of every month.

Now, in above case had you bought Infosys in cash segment instead of futures then first of all you need to pay Rs. 2,50,000 instead of Rs. 25,000 and hence the return on investment will be relatively lesser:

ROI  in futures =  5,000/25000= 20%
ROI in cash segment = 5,000/ 2,50,000= 2%

The same will be true for losses as well

You can see the difference, the prime benefit of trading in futures is leverage they allow you to control large amount of shares with a relative smaller investment. So, smaller moves on either side will mean big to you.

4) You are not the owner of the shares: Futures contracts get expired after specified date. While buying the future contract we pay the margin amount, not the full amount, hence we don't own the shares in our demat. Whereas, if we buy shares from cash market we pay full amount and hence receive the shares in our demat account.

5) Short Selling- The idea behind shorting is to gain from the fall in prices of stocks, In case of cash segment we have to close our short positions on the same day i.e. if we short a stock we have to buy it back before market closes on the same day. Whereas in futures, we can keep our positions open for long duration depending upon the expiry of futures contract we purchase.

6) Hedging Tools- You can use futures to lock your profits. Suppose you bought Infosys for Rs. 700 and few months later you find it trading at Rs. 1000, giving you gains or Rs. 300 per share.

After analysis, you feel that now the price of Infosys can fall down in coming days. So, in order to lock your gains you can short sell one lot of Infosys futures at Rs. 1000

Now, if price falls down from Rs. 1000 to say Rs. 900,, your loss from the shares will b offset by gains in the futures contract. Similarly if the prices of Infosys rises against your expectations the gains would be offset of losses in futures. So, by using futures you can lock your gains irrespective of price movement in the share.

7) Trading Futures- For Trading futures, you need to place an order with your broker specifying the details of contract like name of scrip, expiry month, order size etc. The broker will ensure your order gets executed provided that you have required margin in your account.

8) Settlement- You need not to hold your contract till expiry date you can square them off any time you wish. Any losses or gains made will be settled in your account. If you choose to hold it till expiry it will be settled at the closing price of the underlying asset as on the expiry date of the contract.

How to Settle Futures Contracts By Kotak Securities®

Image Credits: Kotak Securites

Although futures are risky instruments for newbie investors but we can surely utilize their potential by using them as hedging tools. 

In our coming posts we will will be covering how to trade in options segment and various advanced strategies you can implemet to pull out profits from it, stay tuned. Hope you liked this post

Happy Investing
Multiplier Wealth

Write comments
  1. Hi Abhishek Ji ,

    i came to know your blog just few days ago.. First i am very thankful for you for sharing the knowledge about sharemarket here.. I would like to know about your previous recommendation SUDAR INDUSTRIES (recommended @ 44 rs on 27/9/2014 ). Is it good to buy at current Market price...Kindly advise.

    1. avoid sudhar for now its in constant downtrend since those levels.................. however the stock has got some support at 6.1-6.2 levels in case u go for it keep strict stoploss at 6.......... happy investing

  2. Very well explained article.....Thanx