Futures refer to the contracts by which the holder gets an opportunity to buy or sell the instrument at a pre-determined price and at a future date. Investors need to understand various elements while trading in futures. Let us discuss in detail.
How to buy futures contract?
How do you buy shares? Well, you can buy even one share. You have the facility of buying it in any number. But in case of futures, you need to buy a futures contract. You are supposed to buy a particular size of lot. Let us study this by way of a simple example. If you want to buy futures contract of a company. It will be in the form of 100 shares. Thus, you are not buying 10 shares but lot consisting of 100 shares. Every futures contract is assigned with a lot size. The lot size differs from stock to stock.
What do you need to pay for buying futures contract?
While buying futures contract, you do not have to pay the complete value of the contract. You are supposed to pay only the margin of the futures contract. The exchange assigns this margin amount for you. Suppose, you are buying futures contract of a company. The price of each share is Rs. 300. You are buying a lot of 100 shares and thus, paying Rs. 30000. Now, you do not have to pay the complete amount of Rs. 30,000 but you must pay only 15% or the specified percentage of the amount. This amount is known as the margin amount.
The exchange prescribes specific margin for the day. The margin amount fluctuates with it. Thus, the exchange allots the margin for the stock on the basis of certain factors.
How do you earn or lose in a futures contract?
Now, do not compare the above question in an unethical way. Yes, you do earn and also lose money in a futures contract. And that too, on daily basis! Surprising? Let us take an example. You have bought a futures contract of a company prices at Rs. 300 per share. Next day, it has increased to Rs. 301. Thus, you are earning the difference of Rs.1 per share and the amount is reflecting on the credit side of your account.
The next day, it falls to Rs.299. Your account gets debited by Rs.2 per share and there, you are suffering from a loss.
Well, this process continues till the expiry of the futures contract of when you actually sell the entire futures contract. So, each day, you are either earning or losing money.
Advantages of futures contract
Well, you are interested in the complex functionality of the futures market. But are you aware about the advantages it offers. You are not required to open a separate demat account for trading purpose. You also do not have to pay the entire amount; you bear only the margin amount. The brokerage involved is low. Though the process sounds a bit complicated, you can effectively trade in futures market if you have the requisite patience and potential.
Thus, if you are looking out for a high-core investment alternative, then futures contract is suitable for your portfolio.
