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Tutorial: Indian Futures..!!
Are you interested in business but don’t want to have a
typical house of CAs, attorneys and bookkeepers? Well, you can
be a businessman (or businesswoman) without having to handle
all these people! Are you wondering how? Futures Trading is
the answer. All you need is a personal computer! No
warehousing, no fear of competition, no dealing with
customers. You can operate from anywhere in the world with
very little capital and can be 99% sure of unlimited earnings
and real wealth – 99 because markets are synonymous with risk.
Now if you are pondering over what is Futures Trading, it is a
means of speculating security’s price going up or down in the
future. A security here could imply stock (RIL, TISCO etc.),
stock index (NSE), asset (gold etc.), currency (dollar, pound,
sterling, euro etc.) etc. Also while trading futures, you do
not purchase or sell anything. You merely bet on the way the
stock would go in the future – you buy a futures contract
if you think the price would increase in future and sell if
you sense the price would decrease. There is always a buyer
and seller in every trade but neither owns anything. All that
the future trader has to do is deposit enough money with
her/his brokerage firm in order to pay up if their trade loses
So what exactly are futures?
You buy a futures contract, but what is this futures contract?
No need to get boggled by the terminology used. A futures
contract is a usual contract, the difference being that you
buy or sell at a certain date in the future and at a specified
price. Please remember the following terms while agreeing to a
Futures date – Delivery date or final settlement date
Futures price – Pre-set price
Settlement price – Price of the instrument on the delivery
Also remember that if you are entering into a futures
contract, then unlike the options contract, both the
prospective ‘buyer’ and ‘seller’ are bound by the contract and
HAVE to buy/sell the underlying instrument, as the case is.
We are sure you would have understood that in a futures
contract, the seller delivers her/his asset to the buyer. In
case the futures contract is made on stocks, then cash is
transferred from the traders who sustained a loss to the
trader who enjoyed profit.
Like all other contracts, you can egress from a futures
contract also. All that the holder of the futures position has
to do is, prior to the settlement date, either sell a long
position or buy back a short position thus offsetting his
A typical futures contract would have the following features:
Underlying asset or instrument – this can be anything from
gold and crude oil to a specific stock or share.
Type of settlement – settlement can either be monetary (common
in India) or physical.
Unit of underlying asset per contract – this can be a barrel
of crude oil, two kilos of gold, etc.
Currency in which the futures contract is quoted.
Grade of deliverable – this specifies which bonds can be
delivered in case of bonds, while in case of physical
commodities this also mentions the manner and location of
Last trading date.
Please note that the Securities and Exchange Board of India (SEBI)
regulates futures trading.
We now proceed to the next level – How does futures trading
Categorically speaking there are two participants in futures
trading – hedgers and speculators.
Hedgers, as the name suggests, comprises of those who protect
themselves from losses. Using futures as a medium, the raison
d’etre is based upon the predisposition of cash prices and
futures value to move in tandem.
For easier understanding, let’s take the example of a food
processor canning barley. If the price of barley increases,
the processor has to pay more to the farmer or dealer. In
order to “save money” and keep the price constant, the
processor may buy barley futures contract covering the barley
amount she/he is to buy. Since cash and futures prices move
hand-in-hand, the futures position will profit if barley
prices rise enough to balance barley cash losses. Speculators
on the other hand, unlike hedgers, can gain and enjoy huge
profits if they can read the market well. This is because
capital in futures market rises quicker than real estate or
stock. Similarly, wrong speculation can cause heavy losses. In
futures, unlike stocks, traders put up only a margin, say 10%,
since the money thus put up is only a performance bond and not
a down payment. The actual value of the contract is exchanged
when delivery takes place and this is rare. In addition, the
futures investor does not have to pay any interest on the
difference between the margin and full contract value. Futures
contract is, relatively speaking, a new term in India. A
typical contract is settled when the agreement has been abided
by. But how are futures contract settled? Buying or selling
offsetting position settles futures contract allowing the
participant to realise profit/losses. The margin balance along
with any additional gains is returned to the holder, or
credited towards the holder’s loss. Cash is brought into play
only where delivery is impossible.
The option of delivery has been kept open in futures contract
so as to ensure that the futures price and cash price of the
good congregate at the expiration date. If this does not
happen then the trader could purchase at a lower price, sell
in the futures market at a higher price and make a handsome
profit. Traders can make huge profits from a very meagre
To highlight some advantages of engaging with futures trading:
· High leverage – Futures trading guarantees excellent
profits IF you are a good reader of the market. As stated
before, futures trading require only a portion of the contract
as ‘margin’. Thus if the investor has deposited 10%, the
profit earned will be ten-fold provided, of course, the market
prediction is correct. This is better than buying and taking
physical delivery of stocks.
Profit irrespective of market condition – Futures trading
also promises profits irrespective of whether the market is at
a high or suffering from lows IF chosen correctly.
Lower transaction cost – Commission for trading a futures
contract is one-tenth of a percent while it is as much as one
percent for trading stocks!
· High liquidity – Contracts are traded very frequently in
most markets on a daily basis ensuring quick market orders’
Futures trading is today being addressed as the perfect
business and there are lots of reasons for this.
For one, you only need a computer (your start up cost). You
work from your home, no permits or licences required, no
employees to handle, no need for advertising, no set hours, no
selling, no inventory, no restrictions on markets to trade, no
need to worry about which way the market is going as profits
are guaranteed, no interest charges, no transaction fees – all
these factors, combined with many more, are why futures
trading is being talked of as ‘perfect business’.
With dedication and discipline and little help from our
newsletter services, we assure constant cash flow for you.
Please remember, while all the information will help you to
trade better, you will become a better trader only if you are
able to read the market well.