By Irshad Mushtaq
Market In the Indian stock market, futures trading is a part of the broader derivative market. These trades primarily take place on the National Stock Exchange (NSE). Futures are contracts that obligate the buyer to purchase, and the seller to sell, an asset at a predetermined future date and price.
Characteristics of Futures
1. Predefined List of Stocks: Futures are typically linked to stocks with high market capitalization. The NSE has a specific list of these stocks.
2. Lot Size: Futures contracts are traded in predefined quantities called lot sizes. For example, if a stock has a lot size of 50 shares, you must buy or sell futures in multiples of 50.
Margin and Payment Mechanism
Margin Requirement: To trade futures, clients are required to pay a margin, which is a percentage (usually 10-15%) of the total contract value. This margin can be paid in cash or through collateral, like pledging shares or mutual funds.
Mark-to-Market (MTM): Daily billings are generated to reflect market profit and loss until the contract expires. This MTM ensures that gains or losses are settled daily.
Contract Expiry and Life Cycles
Expiry Cycles: Futures contracts in India have a 3-month life cycle, expiring on the last Thursday of each month. If that Thursday is a holiday, the expiry moves to the preceding trading day. Uses of Futures Futures can be used for various purposes: 1. Speculation:Trading to make profits from price movements.
Hedging: Managing risk in stock holdings.
Arbitrage: Taking advantage of price differentials in different markets. Risks and Discipline It is often stated that 9 out of 10 traders lose money in the derivatives market. This high failure rate underscores the risky nature of leveraged products and the necessity for a sound understanding of market concepts, proper money management techniques, and disciplined trading.
Options in Futures Trading
Call Option: Grants the right to buy but not the obligation
Put Option: Grants the right to sell but not the obligation. Success in futures and options trading requires expertise, vision, patience, and strict adherence to risk management principles. Over-leveraging and undisciplined trading can lead to significant losses. In summary, while the derivative market in India offers opportunities for significant gains, it demands a high level of knowledge, discipline, and prudent money management.
- Learn from the insights of @IrshadMushtag, writer, investor, entrepreneur & Founder of MI Securities! Connect for valuable financial advice at [email protected]
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