BAJAJ BROKING
January 07, 2025
11 mins read
Futures are financial derivatives that represent an agreement between two parties to buy or sell an asset at a predetermined price on a future date. These contracts are standardised and traded on exchanges, covering various assets such as stocks, commodities, and indices. Traders and investors use futures for hedging against price fluctuations or speculating on future market movements.
Futures contracts enable the trading of an asset at a fixed price on a specified future date. These contracts outline key details such as contract size, expiration date, and price terms. Understanding what are futures in the stock market helps traders make informed decisions regarding risk management and market speculation.
In order to have a comprehensive understanding of futures trading, one must have a thorough knowledge of derivatives first. Derivatives are financial contracts that derive their value from the price movement of some other financial instrument. This provides the foundation for understanding futures trading meaning.
Futures are a type of derivative contract for the purchase or sale of an asset on a future date at a predetermined price. That asset can be shares of a company, a commodity, coffee, silver, gold, etc. In a futures contract, one party is a buyer (the one having a long position) and the other is a seller (the one having a short position).
The buyer of futures agrees to buy a certain quantity of a commodity or securities, and the seller agrees to provide it. Futures contracts are traded on the Exchange. As time goes by, the price of the contract changes based on the price of the underlying asset. This fluctuation creates profit or loss for the trader.
Futures trading is an obligatory agreement between a buyer and seller for trading derivatives as per the agreement. Here, both buyers and sellers are bound to honour the contract, making it a key feature of futures trading meaning.
In order to have a comprehensive understanding of futures trading, one must have a thorough knowledge of derivatives first. Derivatives are financial contracts that derive their value from the price movement of some other financial instrument.
So, futures are nothing but a type of derivative contract for the purchase or sale of an asset on a future date at a predetermined price. That asset can be shares of a company, a commodity, coffee, silver, gold, etc. In a futures contract, one party is a buyer (the one having a long position) and a seller (the one having a short position), where the buyer of Futures agrees to buy a certain quantity of a commodity or securities and the seller agrees to provide it. Futures contracts are traded on the Exchange. As time goes by, the contract’s price tends to change based on the price of the underlying asset. This frequent change in the price of the contract also creates profit or loss for the trader. Futures trading is an obligatory agreement between a buyer and seller for trading of derivatives according to the agreement. Here both buyers and sellers are obligated to honor the contract in futures trading.
What are stock futures? Suppose you have purchased a futures contract based on an underlying stock that consists of 100 shares. The expiration date of the contract is January 01 for Rs. 100 per share. You pay the necessary margin amount and place the order. Let us assume on January 01; the stock is trading at Rs. 120. Since the stock is trading at a higher value, here is a chance for you to make a profit.
You exercise your stock market futures contract, which entitles you to purchase 100 shares for Rs. 100 each. You then sell these shares at their current price, i.e., Rs. 120 and instantly make a profit of Rs. 20/share (minus the margin money paid). Your profit gets credited to your account after making necessary deductions in the form of commissions and associated brokerage fees. Suppose you incur a loss as the share prices drop to Rs. 90. In such cases, the amount gets deducted from your cash balance in the trading account.
Stock futures are derivative contracts that allow traders to buy or sell a specific stock at a predetermined price on a future date. These contracts are legally binding agreements between buyers and sellers, ensuring the trade happens at the agreed price, regardless of market fluctuations. Stock futures have standardised terms, including lot size, expiry date, price quotation, tick size, and settlement method.
They are commonly used for hedging against price volatility or for speculative trading. Investors use stock futures to lock in prices, manage risk, or take advantage of potential price movements in the underlying stock
Futures trading is a popular way for investors in India to participate in the futures market. Before you start trading, it is important to understand what are futures in the stock market and the concept of a futures contract.
Firstly, ensure you thoroughly understand how futures in the stock market work. Futures are financial derivatives that allow traders to buy or sell an asset at a predetermined price on a future date. Unlike stocks, futures involve margin requirements and carry a higher risk-reward ratio.
To begin, open a trading account with a reputable broker that offers access to the futures market. Evaluate their fees, margins, and trading platforms to ensure they meet your needs. Arrange for the margin money, as trading futures requires an initial margin deposit, often between 5-10% of the contract size. Once ready, familiarise yourself with various trading strategies for futures trading. Practise using simulated accounts to gain confidence without risking actual money. This hands-on experience helps you understand market trends and price movements.
Finally, execute your trades by selecting the appropriate futures contract. Ensure you monitor your positions closely and manage risks efficiently. Settlement can occur on or before the expiration date, either through physical delivery or cash settlement, depending on the nature of the contract.
The futures market attracts a variety of financial players, including investors, speculators, and companies. These participants may seek to physically accept the delivery of the commodity or supply it based on the terms of a futures contract.
Futures contracts are often used by hedgers to fix the buy or sell price of an underlying commodity on a specific date. This helps protect against potential price fluctuations and ensures stability in transactions.
To illustrate how futures trading works, let’s consider a jar of beans. If the price of beans rises, a major food processor reliant on beans for their business would need to pay the farmer or dealer more. To hedge against this risk of price increase, the processor might buy beans futures contracts to cover their exposure to price changes. This proves advantageous for the buyer if the price of beans goes up.
Similarly, in the stock market, individuals can hedge stock prices using stock futures. Futures contracts can be purchased for individual stocks or indices to mitigate the risk of market volatility.
Notably, the buyer of a futures contract does not need to pay the full contract value upfront. Instead, only an initial margin is required, which can be managed conveniently using a futures trading app.
Futures contract is used by Hedgers to fix the buy or sell price of the underlying commodity on a specific date.
To illustrate how futures trading works, let’s consider a jar of beans. In the event of the price of beans going up, a major food processor who is dependent on beans to run the business will have to pay the farmer or the dealer more. For protection against this sudden rise in the price of beans, the processor may want to “hedge” his risk by buying beans futures contracts to cover the risk of price changes. It will prove beneficial for the futures contract buyer in case the price of beans goes up.
Similarly, in the stock market too, people can hedge stock prices through stock futures. It can be purchased now on stocks or on an index. The buyer of a futures contract does not have to pay the full amount of the contract beforehand. Only initial margin is to be paid using a future trading app.
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Starting with futures trading involves a step-by-step approach to understand the market dynamics and mitigate risks. Beginners should first educate themselves on the functioning of the futures market, the associated terms, and the risks involved.
Understanding futures trading hours is crucial, as different assets have varying trading sessions. For instance, commodities like gold trade until late evening on the MCX, while stock futures adhere to NSE timings.
Start with Futures Trading Strategy
A robust futures trading strategy is essential for success in the futures market. Beginners can consider strategies like trend following, where traders enter positions based on the prevailing market trend, or range trading, which focuses on buying at support and selling at resistance levels.
Another approach involves hedging, where traders use futures contracts to mitigate the risks of adverse price movements in their portfolios. For instance, if you own shares of a company and expect short-term volatility, selling futures contracts for the same stock can offset potential losses.
The flexibility offered by futures trading hours allows traders to implement strategies that align with their availability. For instance, evening trading hours on the MCX enable working professionals to trade commodities like crude oil or natural gas after traditional market hours.
Always backtest and refine your futures trading strategies using historical data before applying them in live markets. This helps identify potential risks and optimise for better results.
There are two types of Futures traders - Hedgers and Speculators:
Hedgers: Hedgers are investors who buy derivative instruments to safeguard their capital from losses. They use futures trading to lock in prices and protect against adverse price movements. For example, a jewellery manufacturer may purchase gold futures to hedge against rising gold prices, ensuring stable production costs despite fluctuations in the futures market.
Speculators: Speculators aim to profit from the rise and fall of derivative contract prices. Their buying and selling decisions are driven by market conditions and the demand-supply scenario of the derivative. Speculators rely on futures trading strategies to anticipate price movements and maximise profits, often leveraging the extended futures trading hours for flexibility.
Other prominent types of traders include Arbitrageurs and Day Traders. Arbitrageurs exploit price differences between the futures market and the spot market, earning risk-free profits by simultaneously buying and selling assets in both markets. Their success depends on precise timing and a deep understanding of futures trading meaning.
Day Traders focus on intraday price movements, entering and exiting positions within the same trading session. By leveraging high liquidity and long futures trading hours, they can execute quick trades. Understanding the type of trader you aspire to be is crucial for designing effective futures trading strategies aligned with your financial goals.
There are two types of Futures traders - Hedgers and Speculators:
Hedgers: Hedgers are investors who buy derivative instruments for the purpose of safeguarding their capital from losses
Speculators: They make profits from the rise and fall of the derivative contract price. Their entire buying and selling of Futures and Options are dependent upon the market situation and the demand-supply scenario of the derivative.
The key difference between Futures and other financial instruments is:
One of the biggest advantages of Futures Trading is that there’s no risk of default. The clearing corporation on the stock exchange gives a counter-guarantee for every trade of futures in the stock market. This ensures that sufficient margin is maintained by the respective counterparties in the contract to avoid the risk of default. Trading in futures lets you take position in larger contract size by just paying the margin amount.
Pros | Cons |
High leverage for increased profit potential | High risk due to leverage magnifying losses |
Useful for hedging price volatility | Requires careful monitoring and expertise |
Flexible futures trading hours for global assets | Risk of margin calls in volatile markets |
Standardised contracts ensure transparency | Losses can exceed initial investment |
Futures are used by traders and investors to form an opinion on the price movements of the underlying asset.
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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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Futures in the stock market are financial contracts to buy or sell an asset at a predetermined price on a future date. These contracts are often based on the value of company shares or stock indices, such as the S&P 500 or Nasdaq.
Futures trading involves two parties agreeing to exchange an underlying market asset for a fixed price at a specified future date. These trades are based on the futures contract terms, which include the strike price, expiration date, and contract size.
To buy futures, place an order with a broker by specifying the size, number of contracts, strike price, and expiration date. Brokers offer various futures contracts in the futures market, allowing you to choose based on your preferences.
Whether futures are better than stocks depends on your experience and risk tolerance. Futures trading offers leverage and extended trading hours but involves higher risks. In contrast, stocks provide ownership benefits like dividends and long-term growth, with fewer tax complexities.
Among different trading styles, long-term trading is considered the safest. It minimises risks compared to more complex strategies like futures trading and allows investors to focus on steady growth and stability over time.
The margin in futures trading is the deposit a trader must maintain with their broker to open and sustain a position in the futures market. It ensures the trader honours the contract and protects against losses. There are two types: initial margin, required to open a position, and maintenance margin, which must be maintained to hold it.
While the futures market is closed on weekends, it operates nearly 24 hours a day from 6:00 p.m. (ET) on Sunday to 5:00 p.m. (ET) on Friday. These extended futures trading hours provide flexibility to manage positions during events outside regular stock market hours.
Futures trading involves buying or selling financial contracts that obligate the buyer to purchase, and the seller to deliver, an asset at a predetermined price and future date. This trading occurs on exchanges and is used for speculation, hedging, or managing price risk.
An example of futures trading: A trader buys a futures contract for 100 shares at £50 each. If the share price rises to £60, they profit £1,000. Conversely, if the price falls to £40, they face an equivalent loss.
Futures trading can be profitable but carries significant risk. With the use of leverage, it offers potential for high returns but also substantial losses. Success requires a deep understanding of the futures market, strong risk management, and effective futures trading strategies.
The best futures trading hours are often during high market activity, particularly when the U.S. stock market opens at 9:30 a.m. (ET) and closes at 4:00 p.m. (ET). However, traders can leverage extended hours on the CME Globex exchange for added flexibility.
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Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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