Futures trading is one of the most powerful and widely-used tools in the financial markets. Whether you’re a trader looking to profit from short-term price movements, or a business trying to hedge against future risks, futures contracts provide flexibility, leverage, and opportunities.
In this guide, we’ll explore what futures trading is, how it works, its key components, real-life examples, and how beginners can get started safely.
What is Futures Trading?
Futures trading involves buying and selling contracts called futures, which obligate the buyer and seller to transact a specific asset (like a stock, index, commodity, or currency) at a predetermined price on a specific future date.
Unlike options, where the buyer has the right (but not obligation), futures contracts must be settled unless squared off before expiry.
These contracts are standardized and traded on exchanges like NSE (National Stock Exchange) and MCX (Multi Commodity Exchange) in India.
Key Components of a Futures Contract
Here are the essential elements every futures trader must understand:
- Underlying Asset: The asset on which the contract is based (e.g., Nifty, Bank Nifty, crude oil, gold, Reliance stock).
- Lot Size: Minimum quantity you must trade. For example, 1 lot of Nifty Futures = 50 units.
- Expiry Date: Futures have a fixed expiry — weekly or monthly.
- Margin Requirement: You don’t pay the full contract value upfront. Instead, you pay a small percentage (margin), which offers leverage.
- Mark to Market (MTM): Daily profits/losses are credited or debited to your account.
How Does Futures Trading Work?
🔁 Example 1: Index Futures (Speculation)
Let’s say Nifty is trading at 22,000, and you expect it to rise in the next few days.
- You buy 1 lot of Nifty Futures at 22,000.
- Each lot = 50 units, so contract size = ₹11,00,000.
- Margin required ≈ ₹1,00,000 (approx 9%-10%).
If Nifty moves to 22,200, you earn:
CopyEdit(22,200 – 22,000) x 50 = ₹10,000
If it drops to 21,800, you lose ₹10,000.
You can close the position anytime before expiry.
🔁 Example 2: Commodity Futures (Hedging)
Imagine you’re a jewelry manufacturer. You want to lock in gold prices to avoid future price spikes.
- Gold is ₹60,000 per 10 grams.
- You buy gold futures at ₹60,000 to be delivered next month.
If prices rise to ₹62,000, you still pay ₹60,000 due to the contract. You saved ₹2,000.
This is called hedging, and businesses use it to reduce risk.
Types of Futures Contracts
Futures can be based on:
- Stocks (e.g., Reliance, TCS)
- Indices (e.g., Nifty, Bank Nifty)
- Commodities (e.g., crude oil, gold, silver)
- Currencies (e.g., USD/INR futures)
- Interest Rates / Bonds
Why Trade Futures?
✅ Benefits of Futures Trading:
- Leverage: Trade large positions with small capital.
- Liquidity: Popular contracts like Nifty, Bank Nifty are very liquid.
- Hedging: Protect against price risks in portfolios or businesses.
- Two-Way Trading: You can go long (buy) or short (sell) easily.
- Transparency & Regulation: Futures are exchange-traded and regulated by SEBI in India.
⚠️ Risks of Futures Trading:
- High Leverage = High Risk: Small price moves can cause big gains or losses.
- Daily MTM Adjustments: Profits/losses settled daily can lead to margin calls.
- Expiry Pressure: Positions must be squared off or settled before expiry.
- Complex Pricing: Influenced by interest rates, volatility, dividend expectations, etc.
Futures vs Options: Key Differences
| Feature | Futures | Options |
|---|---|---|
| Obligation | Buyer & seller must fulfill | Buyer has right, not obligation |
| Risk for Buyer | Unlimited | Limited to premium |
| Premium | No upfront premium | Buyer pays premium upfront |
| Leverage | Higher leverage | Slightly less |
| Profit/Loss Potential | Unlimited | Limited (for buyer) |
Futures Trading in India: How to Start
📝 Step-by-Step Guide:
- Open a Trading + Demat Account
Choose a broker like Zerodha, Upstox, Angel One, or Groww. - Enable Derivatives (F&O Segment)
Submit income proof (ITR, salary slip, or bank statement) for Futures & Options activation. - Choose Your Asset
Start with index futures like Nifty or Bank Nifty, which are less volatile than stock futures. - Use Stop Loss and Risk Management
Don’t risk more than 1-2% of your capital per trade. - Learn to Read Charts & Indicators
Use tools like Moving Averages, RSI, Support/Resistance for better timing.
Important Tips for Beginners
- 📊 Use Paper Trading First: Practice without real money on platforms like Sensibull or TradingView.
- ⏳ Avoid Holding Till Expiry: Close positions early to avoid last-day volatility.
- 💼 Manage Margins: Keep extra funds to avoid forced liquidation.
- 🔍 Check Volatility: Futures are more volatile near expiry or during events.
- 📘 Keep a Trading Journal: Track trades to learn from mistakes.
Popular Futures Trading Strategies
- Trend Following: Buy futures when price is above moving average.
- Breakout Trading: Enter when price breaks key levels with volume.
- Hedging: Offset risk from stocks using index or sector futures.
- Calendar Spreads: Buy one expiry, sell another to profit from time decay.
Conclusion
Futures trading can be a powerful tool when used with knowledge and discipline. It offers opportunities for speculation, risk management, and portfolio diversification. But it’s not a game for the impulsive — it requires planning, control, and continuous learning.
If you’re a beginner, start small, trade with a clear plan, and never risk money you can’t afford to lose.