Futures trading – shareinfobazaar

Meaning of Future trading :-

Futures trading is a type of derivatives trading. Futures trading involves a legal agreement to buy or sell a derivative at a predetermined price at a predetermined time in the future. The underlying asset of a derivative can be a commodity or a financial instrument.

In Futures trading, the buyer and seller have an obligation to fulfill the contract at a predetermined price and time. The predetermined price is called the Future price and the predetermined time is called the delivery date. Also, there is no fixed minimum account size for futures trading in India.

Since the lot size in the equity segment is 100 shares, it depends on the current market price of the share.

If you want to do futures trading on a regular basis, you will need to start with a capital of ₹50,000, although some investors may suggest more than this amount.

Futures trading

Features of Futures Trading :-

Before we understand the mechanism of futures trading, the following are some of the salient features of futures contracts :-

The price of a futures contract depends on the price of the underlying asset:- If the price of the underlying asset in the future increases, conversely, the price of the futures contract also increases.

Can be transferred and traded:- Futures contracts can be transferred with other traders, and are therefore tradable. If one party changes mind during the contract, it can be transferred to someone else and that party can move out.

Highly Regulated:- Since there is a risk of both the parties not meeting their obligation in futures trading, the futures market in India is highly regulated by regulatory authorities like SEBI.
SEBI overlooks the smooth functioning of the market of futures trading and greatly reduces the chances of default.

Standardized:- Futures contracts are always standardized and cannot be customized as per individual requirements and positions are also non-negotiable.

Settlement :- Futures contracts are settled in cash, so physical movement of the underlying asset is not required. Only the difference in cash values ​​is paid from one party to another.
Thus, make sure you understand the above mentioned features (in a sense, the rules) before getting into futures trading, otherwise it may lead to unnecessary financial losses or troubles.

Futures trading

Strategy in Futures trading :-

Although, we will discuss all the investment strategies of futures trading in a separate review. However, here we will discuss some of the most commonly used strategies:

Long Call :-

You go fast in this strategy and go for buy investment at a pre-determined price on a future date.

Short call

You are bearish in this strategy and go for a sell investment at a pre-determined price at a future date.

short put

In this strategy, the seller will be obliged to sell the shares at a pre-determined price on the expiry date if the buyer chooses to exercise the option contract.

Obviously, the buyer will do this when the market price or strike price of the stock has exceeded the (pre-determined price).

long put

Here, as a buyer, you get the right to buy the option at a pre-determined price at a future date. The seller will be obliged to sell it to you at that price. However, you can choose not to use the option if you wish.

bull put spread

Here two options contracts are combined, where you buy and sell 2 option contracts at the same time, however, the strike price of one of the contracts is higher than the other.

Bear Call Spread

Here again, there are two options contract functions, where two calls are taken from the same underlying asset and expiry date. The strike price of the call option purchased must be greater than the strike price of the call option sold.

Of course, there are many other futures trading strategies that can be employed depending on the market trend and investment objectives. Thus, you are suggested to have a thorough understanding of how these strategies work and only then work on your trades.

Futures trading

Benefits of Futures trading :-

Here are some of the benefits of using futures trading as part of your overall investment plan:

Leverage due to the provision of margin trading: Using a margin trading account, positions in the futures market can be taken by paying only a fraction of the total contract value.

If the market moves in the expected direction, the return on investment becomes very high. However, if the market does not move in the right direction then losses can happen.

Liquidity: The number of futures contracts that are traded every day is quite high, so the futures market is very liquid.

It is easy to enter and exit the market at any point. This also has the effect that the market does not move up.

Low Brokerage Costs and Commissions: The brokerage and fees charged on futures contracts are quite low, so the investor does not have to pay a huge amount in commission.

Hedging: Futures trading is a very important mechanism for hedging or diversification of portfolio and risks. In particular, in the foreign currency market and interest rate market, futures trading greatly helps in hedging the risk due to price fluctuations. Is.

It is widely used by importers and exporters to hedge their risks due to foreign currency price variations at the time of order and delivery.

Short Selling: There are several restrictions on short selling of shares individually, but short-selling of futures contracts is legal and the investor is able to sell the futures contract to obtain less exposure to the stock.

Fair and easy to understand: Futures trading is simple and easy and it is not as complicated as options trading.

The futures market is also strictly monitored and made very fair to both the parties by regulatory authorities like SEBI.

Futures trading is a very efficient way of making money due to the provisions of leverage and hedging.

But but at the same time, investors need to be very cautious while investing in the futures market, as they are equally risky due to high leverage and high contract value.

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