Futures Trading

Purchasing a futures contract is equivalent to purchasing several units of stock on the open market. The primary distinction is that when you buy futures, you buy a contract. Let's go over some future trading fundamentals and strategies. It is critical to comprehend the concept of the future. Futures are nothing more than a financial contract that obligates the buyer to buy an asset or the seller to sell an asset at a predetermined future date and price.

What distinguishes futures trading from other financial instruments

Futures have no inherent value. Its price is determined by underlying asset. Futures are standardised contracts that promise physical delivery of goods on a specific date, which other financial instruments do not. The stock investment, on the other hand, represents your ownership of the company's future income and profit. Investors in stocks can keep their investments for as long as they want. Stocks do not expire, but futures do. As a result, the time factor is critical in futures trading.

How to Invest in Futures

Futures trading is available in India on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Let's look at how to trade futures in India.

Understand how futures work thoroughly: Futures are sophisticated financial instruments that differ from other tools like stocks and mutual funds. Trading in futures can be difficult for someone who is investing in stocks for the first time. If you want to start trading futures, you must first understand how futures work, as well as the risks and costs involved.

Determine your risk tolerance: While we all want to make money in the markets, futures trading can also result in a loss. Before you can learn how to invest in futures, you must first determine your risk tolerance. You should be aware of how much money you can afford to lose and whether doing so will have an impact on your lifestyle.

Determine your trading strategy: It is critical to plan one's trading strategy for the future. Based on your knowledge and research, you may want to invest in futures. You could also hire an expert to assist you with this.

Open a trading account: To begin trading in futures, you must first open a trading account. Perform a thorough background check before opening a trading account. You should also inquire about the costs. When investing in futures, it is critical that you select the best trading account for you.

Plan for the margin money requirement: Futures contracts require a security deposit of some amount of margin money, which can range from 10 - 15% of the contract size. Once you understand how to buy futures contracts, you must plan for the required margin money. 

Pay the margin money to the broker, who will deposit it with the exchange: The next step is to pay the margin money to the broker, who will deposit it with the exchange. The money is held by the exchange for the duration of your contract. If the margin money rises during that time (i.e. you are not able to maintain that required 10-15% margin), you will be required to pay additional margin money.

Place buy/sell orders with the broker: After that, you can place your order with your broker. Placing an order with a broker is analogous to purchasing a stock. You must inform the broker of the contract size, number of contracts desired, strike price, and expiration date. Brokers will give you the option to choose from various contracts that are available, and you can do so with technology, now you can do this with a few clicks.

SETTLEMENT

A settlement is simply the fulfilment of the delivery obligations associated with a futures contract. While physical delivery is done in some cases, such as agricultural products, delivery of an equity index and interest rate futures is done in terms of cash paid. Futures contracts can be settled on or before their expiration dates.