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Understanding the basics of how to trade in stock futures?
How to trade in stock futures?
Let's first understand what you do in the cash markets, before you go to the futures market. Say you buy 100 shares of Yes Bank in the cash market at Rs 280 and pay Rs 28,000. You hold onto the shares and sell the 100 shares at Rs 300, which equals Rs 30,000. You may a cool profit of Rs 2000.
In the futures market, you can buy more with the same amount of Rs 28,000, because you only pay a margin of say around 15%. So, in the above example, with the Rs 28,000 you would possible be able to buy 1 lot or 500 shares of Yes Bank, translating into a gain of Rs 10,000, instead of the Rs 2000 you made in the cash market.
In effect, what it means that in the futures market you risk is higher and the reward is higher when compared to the cash market, because you get to buy 6 to 7 times the amount, because you only pay margin.
Different types of futures
The two popular types of futures are stock futures and the index futures. A simple example of stock futures would be like in the above example of Yes Bank. Index futures would be something like a Nifty Future, where you buy and sell the Nifty or sell and then buy.
Contracts monitored daily
Futures contracts are monitored on a daily basis and the profits and losses are shown in the account at the end of the day. If there is a loss it will be deducted from the margin money paid and shown accordingly. Profits on the other hand would be added to the margin money.
Expiry of a contract
Futures contract have to be settled within a specified date. In India the futures and options expiry is on the last Thursday of each month. Unlike, cash market where you can keep your shares for a lifetime, you cannot do so in the futures market, where you have to settle the same within a maximum of three months.
In short, futures markets are more risky, because your exposure is higher and you have to settle the same within a limited timeframe.
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