What is future trading?
Future Trading Terminology
A future contract is an agreement between two parties to buy or sell an asset at certain time in the future at a certain price.Stock index future represent an inexpensive and highly liquidity market.
Stock index future can be used to hedge the risk in well diversified portfolio of stocks.Future trading are highly leverage and have high liquidity compared to cash segment.
Advantages of future trading-
Trading in the future is cheaper and profitable compared to cash market,If you buy in cash market then you have to pay full margin amount.
Example-If the share of a company is 250 rs and you have to purchase 500 shares, you have to give 125000 rs.
Future trading can be so profitable is the high leverage to future contract an investor only has to pay small amount of the contact value (it can be usually 11-25% as margin).
If you are purchase same company share in future and its future price 252(Future price is different from spot price) Its lot size is 500 shares.Then contract value will be-
Contract Value= Lot Size x Price of Future
=500 x 252
=126000 rs
=126000 x 20%
Initial Margin=25200 rs(In future trading, you have to pay 20% of the contract value for that company's stock).
Assume the future price of share increase at 270 .this means profit will increase(270-252=18)and
lot size was 500 share than profit will be 9000 rs (18 x 500).
Future trading
Party A-----------------------------------------------------------Party B
A contract between two parties
How do future trading
Selection of stock future
⇩
Contract cycle
⇩
Expiry date
⇩
Lot size
⇩
Initial margin
⇩
Buy or Sell
⇩
Mark to Market
⇩
Maintain Margin
Some important points related to future trading-
a.)Spot Price-The price at which an asset trades in the current market.
b.)Future Price-The price at which the future contract trades in the futures market.
c.)Contract Cycle-The index futures contracts have one month,two month and three month expiry cycle,which expire on the last Thursday of the month.
d.)Expiry Date-All derivative contract expire on the last Thursday of month.
e.)Lot Size-Future contract is a standardize contract.Lot size is the number of shares we need to buy or sell,By increasing the quantity of lots we can increase the number of share.
f.)Initial Margin-The amount that must be deposited in the margin account at time a future contract is first entered into is known as initial margin.
g.)Mark to Market-In future trading,the account adjusted to reflect the investor gain or loss on daily basis.This is called Mark to Market.
d.)Maintain Margin-If the balance in the account falls below the maintenance margin,the investor receives a margin call therefore, it is important to maintain balance.
b.)The profit or loss made on the transaction will be credited or debited of account on same day.
c.)You can square of the position at any time on profit It's not like this,Once we enter into a future contract there is no obligation stick to agreement until contract expire.
Some important point-
a.)Once the trade is executed ,the margin will be blocked,once we square off the future margin are unblocked.b.)The profit or loss made on the transaction will be credited or debited of account on same day.
c.)You can square of the position at any time on profit It's not like this,Once we enter into a future contract there is no obligation stick to agreement until contract expire.
Hope you understand this article what is future trading, if there is any question related to this article, then you can ask and comment.
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