The Futures market ( derivatives market ) is highly regulated by a regulatory authority. In India, the regulatory authority is “Securities and Exchange Board of India (SEBI)”. This means, there is always someone overlooking the activities in the market and making sure things run smoothly.
The futures contracts available to you have different time
frames. The Futures market, contracts would be available in NSE and BSE
is 1 month, 2 month, and 3 month time frame. The time frame up to which
the contract lasts is called ‘ The expiry day ’ of the contract. In NSE
and BSE futures contracts are cash settled. This means only the cash
differential is paid out. More so the cash settlement is overseen by the
regulatory authority ensuring total transparency in the cash settlement.
Futures is a standardized contract where everything related to the agreement is pre-determined. Lot size is one such parameter. Lot size specifies the minimum quantity that you will have to transact in a futures contract. Example Reliance stock Lot size is 500 shares. This means you can buy are sell Reliance shares 500 or in multiplies. The contract value is the quantity times the price of the stock.
Example If you buy one
lot of Reliance shares @ 1000 per share, the contract value is 500X1000=
500,000/- .
In Futures contract the buyer and seller need not pay the full contract value, they will pay only "Margin money" . This margin amount will be fixed by the respective stock exchange. The cash settlement will on done on the expiry day.
In Futures contract the buyer and seller need not pay the full contract value, they will pay only "Margin money" . This margin amount will be fixed by the respective stock exchange. The cash settlement will on done on the expiry day.
Practical Example:
I have decided to buy Reliance shares in anticipation of this share will go up in next 15 days.
Today ( 10th May, 2018
) I entered a futures contract to buy one Lot ( 500 shares ) @1100 per
share.
The contact
expiry date is 28th May, 2018. The contract value is Rs.5,50,000/- , but
I paid only Rs. 1,30,000/- as Margin Money ( This is my Investment ).
On 28th May, 2018 the stock closed @
1150/-
In this transaction the profit is Rs. 25,000/-
Purchase price per share = 1100
Settlement Price per share = 1150
The profit per share = 1150 - 1100 = 50
One Lot is 500 shares
Total Profit = 50 X 500 = 25,000
Return on Investment = 19.23 % in 18 days
This is a case where my directional view on Reliance shares has come true, therefore I made profit.
If my directional view on Reliance shares has gone wrong, then I would be in loss.
Margins clearly play a very crucial role in futures trading as it enables one to leverage. Margins allow us to deposit a small amount of money and take exposure to a large value transaction, thereby leveraging on the transaction. When we transact in a futures contract, we digitally sign the agreement with the counter party, this obligates us to honor the contract upon expiry.
By virtue of leverage a small change in the underlying, results in a massive impact on the P&L
The profits made by the buyer is equivalent to the loss made by the seller and vice versa
Futures Instrument allows one to transfer money from one pocket to another, hence it is called a “Zero Sum Game”
The higher the leverage, the higher the risk.
As we know the futures price fluctuates on a daily basis, by virtue of which you either stand to make a profit or a loss. Mark to market (M2M) is a simple accounting procedure which involves adjusting the profit or loss you have made for the day and entitling you the same. As long as you hold the futures contract, M2M is applicable.
In this transaction the profit is Rs. 25,000/-
Purchase price per share = 1100
Settlement Price per share = 1150
The profit per share = 1150 - 1100 = 50
One Lot is 500 shares
Total Profit = 50 X 500 = 25,000
Return on Investment = 19.23 % in 18 days
This is a case where my directional view on Reliance shares has come true, therefore I made profit.
If my directional view on Reliance shares has gone wrong, then I would be in loss.
Margins clearly play a very crucial role in futures trading as it enables one to leverage. Margins allow us to deposit a small amount of money and take exposure to a large value transaction, thereby leveraging on the transaction. When we transact in a futures contract, we digitally sign the agreement with the counter party, this obligates us to honor the contract upon expiry.
By virtue of leverage a small change in the underlying, results in a massive impact on the P&L
The profits made by the buyer is equivalent to the loss made by the seller and vice versa
Futures Instrument allows one to transfer money from one pocket to another, hence it is called a “Zero Sum Game”
The higher the leverage, the higher the risk.
As we know the futures price fluctuates on a daily basis, by virtue of which you either stand to make a profit or a loss. Mark to market (M2M) is a simple accounting procedure which involves adjusting the profit or loss you have made for the day and entitling you the same. As long as you hold the futures contract, M2M is applicable.
Shorting in the spot market has one restriction – it strictly has to be done on an intraday basis. Meaning you can initiate the short trade anytime during the day, but you will have to buy back the shares (square off) by end of the day before the market closes. You cannot carry forward the short position for multiple days.
Shorting a stock in the futures segment has no restrictions like shorting the stock in the spot market. In fact this is one of the main reasons why trading in futures is so popular. Remember the ‘futures’ is a derivative instrument that just mimics the movement of its respective underlying. So if the underlying value is going down, so would the futures. This means if you are bearish about a stock then you can initiate a short position on its futures and hold on to the position overnight.
Similar to depositing a margin while initiating a long position, the short position also would require a margin deposit. The margins are similar for both the long and short positions and they do not really change.