If you are trading in the stock market, then you must have heard the name of Future Trading at some time, so today we will know in this post what is Future Trading, How Future Trading is Done, Why Trade in Futures and What is the risk in Future Trading?
What is Future Trading?
Before knowing future trading, we know what futures contracts are.
Future Contract:- A Futures Contract is a contract between the Buyer and Seller in which both the Buyer and Seller contract to buy and sell a predefined quantity and a fixed price of something in the future. This contract is called Future Contract.
Future Trading:- The process of buying and selling Future Contract is called Future Trading.
In option, the buyer has the right to buy but, in future trading, the buyer has the obligation to buy. Futures are well suited to invest and trade in Index and Currency as well as a commodity.
How Future Trading is Done?
Future contracts have three-month contracts.
- Current Month Contract
- Near Month Contract
- Far Month Contract
The month for which each Future Contract is due expires on the last Thursday of that month. If we want to buy or sell a Future Contract of HDFC bank, then we can Buy or Sell its three Future Contracts.
We can buy or sell futures only in a lot and lot size varies for each stock and index. This lot size exchange decides what the lot size of stock and index will be. Exchange can change the lot size of any stock and index at any time.
HDFC Bank – lot Size – 500 Shares
Axis Bank – lot Size – 1200 Shares
Contract value: – The contract value indicates the total value of a futures contract. In this way, we can know the current price and lot size of any futures contract, and the value of that future contract.
HDFCBANK APR FUT
Current Price – 1500
Lot Size – 500
Total current Value of this Contract :- 500 X 1500 = 7,50,000 Rs.
In futures trading, both the buyer and seller have to pay an initial margin.
Why Trade in Futures?
If you trade in the future, you can trade in very high shares for very little money. Where we have to give the full Amount of Shares when you buy Shares for more than a day, in the same Futures, we can only trade by giving 15 – 50% of the Shares value, this Amount is also called Initial Margin.
Short Position for a Long Time:- In stocks you cannot take a short position for more than one day, but in future trading, you can keep your short position hold till the contract expire.
Less Brokerage and Taxes:- If we do trading in futures, then overall we have to pay very fewer Charges as compared to Shares Trading.
Features of Futures Trading
There are many features of futures trading, which futures trading is very popular. Let us understand some of the features of futures trading which are as follows.
The price of a futures contract depends on its assets. If the price of the assets increases, the price of the futures contract will also increase.
Futures contracts can be traded easily.
If a trader wants to go out of his contract, he can go out anytime for which he will not have to pay any penalty.
Future trading is the future trading between two parties in which there is always a fear of not fulfilling their contract by both the parties, hence it is regulated by SEBI. So that there is no scam in trading.
Futures trading is run smoothly by SEBI, in which the chances of default are negligible.
Futures trading has its own rules that the trader has to follow.
In futures trading, the time of settlement is fixed, in which both the parties complete the contract on time according to their contract, and for this there is no need for a physical document.
Risk in Future Trading
Future Trading carries more risk than Shares Trading and for this reason, we should manage our risk while doing Future Trading. In the future, we do trade by giving an Amount less than the actual amount, so Risk and Reward are both higher in Future Trading.
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