How to trade in Futures- For Beginners


Few days back, one friend told me that he made a killing trading in Stock Futures.
On asking around, I discovered that many people are now trading in Futures, and doing well. 
This post will explain how it actually works.


How Futures work?

Buy a contract
In case of shares, you can buy any number, even one share. In Futures, you have to buy a contract which will have a specific number of shares termed as lot size depending on the stock.
Let's say you want to buy an SBI Futures contract. This will comprise 2000 shares. Or, you want to buy a TCS Futures contract. This will be a lot of 200 shares.
In Futures, you have to buy a lot. The lot size is fixed for each futures contract and it differs from stock to stock.

Margin payment
For buying a Futures contract, we don't pay the entire value of the contract but just a part which is termed as margin. This margin amount too is prescribed by the exchange.
Let's say you buy a TCS Futures contract.
And the price of each TCS share is Rs 2238. This will amount to Rs 4,47,600 (Rs 2238 x 200 shares).
You don't pay the entire amount of Rs 4,47,600. You only pay 15% to 20% of that amount and this is called the margin amount.
The margin depends on what the exchange sets for the day. Based on certain parameters, it declares the margin for each stock.
So the margin for SBI will vary from, say, INFOSYS.
Let's say the margin for the TCS Futures is 15%. So you end up just paying just Rs 67,140 (not Rs 4,47,600).

How you make or lose money?
You purchased a TCS Futures contract and the underlying price is Rs 2238 per share.
Let's say, the next day it moves to Rs 2240.
The difference is Rs 2 per share (2240-2238)
You get a credit Rs 400 (Rs 2 per share x 200 shares).
The following day, it dips to Rs 2235.
The difference is Rs 5 per share (2240-2235)
Since the price has dipped, Rs 1,000 (Rs 5 per share x 200 shares) is debited from your account.
This will go on till you sell the Futures contract or it expires (last Thursday of the month).
So, on a daily basis you make and lose money.
You can sell the futures contract any time after you purchase and you will make money equal to the difference between the total buy and sell price. You can do intraday or postional both.

Why Futures are popular?


Margin payment
When you buy shares in the cash segment, you have to make the entire payment to your broker. Let's say you buy 200 TCS shares for Rs 2238 per share. You end up paying Rs 4,47,600.
You will have to make the full payment to your broker. 
In Futures, you just pay the margin, not the entire amount.

Can effectively short sell
This is one of the major advantage of futures. When you sell shares without owning them, it is known as short selling. You would do so if you believe that the price of the stock is going to drop. This way, you sell it at a higher rate and buy it at a lower rate later. But the problem in this is that you need to cover the sell on the same day.
With Futures, you do not have to square your transaction at the end of the day. You can square the transaction whenever you want or wait till it expires on the last Thursday of the month. But, in the cash segment, you have to square your transaction by the end of the day, so you can short sell just for a day.

Why Futures are considered risky
In futures what happens is that you pay only a part for taking a positions in any stock but you enjoy profits or incur loss on the entire lot. In the TCS example while you are paying just  Rs 67,140 for taking postion in stocks worth Rs 4,47,600 but you will make gains or losses in the entire 200 stocks as if you would have bought TCS worth Rs. 4,47,600 in cash segment. 
Means even though you didn't paid entire price for 200 stocks but profits or losses will be as if you are holding 200 stocks. As lot size is 200 if the price moves up by 2 rupees you make instant Rs. 400 and if it moves down by 2 rupees you loose 400 instantly.
If you have got a good advisory like us ;) ;) or are good at this yourself you can surely make a killing trading futures. 

Where can you trade?
All stocks are not permitted for trading in derivatives.
To check the list of stocks available for trading, go onto the National Stock Exchange website.
But do note, to trade in futures, you will have to approach a broker who is authorised to trade in derivatives. We highly recommend using a discount broker for trading in derviative segment. 

You may choose to open Zerodha Account Through Us & Get a lot of benefits. Visit this link for details


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1 comments:

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Puru ji
AUTHOR
February 25, 2016 at 10:15 PM delete

The transfer of contract to next month also comes in the news. What is transfer? Can you highlight that also? Is there any cost involved? If yes then what and how is it calculated?

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