In a world where markets swing faster than cricket scores, traders constantly look for tools to ride volatility and shield their portfolios. One such powerful financial instrument is Futures.
So, what are futures in one line?
They are standardized contracts to buy or sell an asset at a predetermined price on a future date.
Used by everyone from retail traders to multinational companies, futures allow market participants to speculate, hedge risks, or lock in prices, all while leveraging their capital. With India's financial markets maturing rapidly, understanding futures trading is no longer optional—it’s essential.
Let’s dive into the world of futures, decode their working, and discover how you can use them smartly.
What is a Futures Contract?
A futures contract is a legal agreement to buy or sell an underlying asset (like a stock, commodity, or index) at a specified price on a future date.
Here’s how it differs from forward contracts:
| Feature | Futures Contract | Forward Contract |
|---|---|---|
| Standardized | Yes | No |
| Traded on Exchange | Yes (NSE, BSE, MCX) | No (OTC) |
| Counterparty Risk | Minimal (via clearing house) | High |
Basic elements of a futures contract:
- Underlying Asset: The item being traded (e.g., Nifty 50 index, Reliance shares, Gold).
- Contract Price: Price agreed today for future transactions.
- Expiry Date: Last Thursday of the contract month (for equities).
- Quantity: Fixed lot size (e.g., 75 shares for Nifty Futures).
Real-Life Analogy: The Mango Story
Imagine a mango farmer in Ratnagiri worried that mango prices may fall by May. He strikes a deal with a wholesaler to sell 100 crates at ₹2,000 each, two months from now. Regardless of future prices, the deal is locked.
This is a futures-like agreement. It protects the farmer from falling prices and gives the wholesaler price certainty. Similarly, in financial markets, traders enter futures contracts to either protect or profit from future price movements.
Key Components of a Futures Contract
Let’s decode the mechanics of a futures contract:
1. Underlying Asset
Futures are available on stocks (like Infosys), indices (like Nifty 50), commodities (like crude oil), and currencies (like USD-INR).
2. Contract Size (Lot Size)
Each contract trades in a fixed quantity.
Example: Nifty 50 Futures = 75 units per lot; Bank Nifty = 30 units.
3. Expiry Date
Equity, Nifty, & Bank Nifty futures expire on the last Thursday of each month. If it's a holiday, expiry is on the previous trading day.
4. Tick Size
The minimum price movement in a contract.
E.g., If tick size is Rs. 0.05, a 1-point move equals Rs. 0.05 x lot size.
5. Margins & Mark-to-Market (MTM)
You don’t pay full contract value upfront. Instead:
• Initial Margin: ~15-25% of contract value.
• MTM Settlement: Daily profit/loss is credited/debited based on market price movement.
This protects against default but can trigger margin calls if your position moves against you.
6. Leverage
Futures offer leverage - small margin, large exposure.
Example: To buy Rs. 1,50,000 worth of Nifty Futures, you may need only Rs. 25,000.
While gains multiply, so do losses.
7. Settlement: Cash vs Delivery
• Stock Futures: Usually cash-settled.
• Commodity Futures: May involve physical delivery (e.g., gold, oil).
| Type of Futures | Examples | Exchange |
|---|---|---|
| Stock Futures | Reliance, TCS, HDFC Bank | NSE/BSE |
| Index Futures | Nifty 50, Bank Nifty | NSE/BSE |
| Commodity Futures | Gold, Crude, Copper | MCX |
| Currency Futures | USD-INR, EUR-INR | NSE/BSE |
Each type caters to a different objective - hedging, speculation, or arbitrage - and requires unique market insights.
How are Futures Traded in India?
1. Where are they traded?
- NSE and BSE handle stock and index futures.
- MCX is India’s go-to platform for commodities.
- NSE/BSE also support currency futures.
2. Who trades futures?
- Speculators: Bet on price movements to make profits.
- Hedgers: Protect portfolio from adverse movements.
- Arbitrageurs: Exploit price differences between cash and futures markets.
3. Standardization
Every futures contract is standardized: asset, lot size, expiry, and tick size are fixed—ensuring transparency and liquidity.
4. Margins
Traders must maintain a SPAN margin + exposure margin, regulated by SEBI.
Why Trade Futures?
| Benefit | Explanation |
|---|---|
| Leverage | Boost your exposure without full capital. |
| Hedging | Lock in prices to protect from volatility. |
| Arbitrage | Profit from temporary price gaps across markets. |
| Diversification | Access to indices, commodities, and currencies beyond just equity. |
Futures trading is not just for experts—it’s a smart tool when used with discipline.
Risks Involved
Every opportunity carries risk, and futures are no exception.
1. Amplified Losses
Leverage cuts both ways. A small adverse move can wipe out your capital.
2. MTM Margin Calls
If your position loses value, you must top up your margin—often the same day.
3. Liquidity Risk
Some contracts have low volume. This can widen bid-ask spreads, impacting trade execution.
4. Rollover Cost
Extending a position to the next month involves cost and slippage.
Pro Tip: Start small, manage risk tightly, and don’t over-leverage.
Futures vs Options: What’s the Difference?
| Feature | Futures | Options |
|---|---|---|
| Obligation | Buyer & seller must transact | Buyer has right, not obligation |
| Upfront Cost | Only margin needed | Premium paid by option buyer |
| Risk Profile | Unlimited gain/loss | Limited loss (for buyer) |
| Complexity | Simpler | Slightly more complex |
While both are derivatives, futures are straightforward and ideal for traders comfortable with market trends.
Regulatory Framework
All futures trading in India is governed by SEBI (Securities and Exchange Board of India).
SEBI mandates:
- SPAN & Exposure Margins to limit systemic risk.
- Brokers like Samco to ensure compliance, risk management, and fair execution.
You can trust platforms like Samco for transparent brokerage, education, and tools to trade safely.
Conclusion
Futures are one of the most powerful tools in a trader’s arsenal. Whether you're looking to hedge risks, make directional bets, or diversify - futures can help you do it with speed and efficiency.
But remember: with great power comes great responsibility.
Educate yourself, manage risks, and trade with purpose.
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