Futures Trade Definition:
The futures trade is one in which contracts in which the parties agree to buy or sell in the future a certain good (agricultural product, mineral, financial asset or currency), defining in this quantity, price are traded and maturity date of the operation.
Futures trade is similar to other futures contracts, such as commodities, except the underlying security is a single population. Futures trade were banned in 1932 to help stabilize markets Depression era, but was reintroduced in November 2002. When trading futures stock, you buy a contract to purchase (or sale) of shares at a price fixed in a pre-defined expiration date. Different from the stock options, carrying out the transaction is required for you and the stock index futures can be traded on margin.
Previously, we have learned about the futures contract, its examples and the benefits of an organized future market. Here in this tutorial guide, we will discuss the futures trade, its participations and how to trade in futures.
Anatomy of Futures Trade:
Learn the mechanics of how to trade stock index futures. Futures trade standardized contracts traded 100 shares. They are issued for a specified period of time and has expire date of every month. At that time, they must be settled. This means that you have to buy (or sell) the actual actions unless an option contract compensation. Attracting futures trade lies in the fact that they can be traded on margin, enabling investors to the offices of leverage and increase the potential benefits.
Who Participates in the Futures Markets?
Individuals or companies involved in the futures markets can be divided into two categories:
Hedgers: Those agents who want to protect themselves from the risks arising from possible fluctuations in commodity prices affecting it, the financial instruments that make up its assets, or foreign currencies in which they agreed transactions or commitments. Consequently, hedgers are risk averse.
Investors in general: They are agents who are willing to take the risk of variability in prices, driven by expectations of making a capital gain. The small amount of investment required to operate in this market is an impassive for investors who want to act on it.
How to Trade in Futures:
Open a margin account with a brokerage firm. Trading accounts margin privileges are similar to regular brokerage accounts (cash), unless it is allowed to borrow money or stock broker, because you buy a futures contract instead of the action, no interest charges. However, this is called a margin transaction as its potential liability of the money is more than the money set as a margin condition. A margin account usually requires a minimum balance of Rs. 2,000, but for day traders this can be as high as Rs. 25,000.
Place an order for a buy or sell futures contract with your broker. Stock Exchange regulations require a margin to trade future contract. For example, if you buy a contract of sale of shares at Rs. 25 per share, you have to put around 10-11% as a margin. If the stock rises to Rs. 5 a share you earn Rs. 500 (Rs.5 * 100 (Lot size)) a gain.
Keep up with the daily fluctuations in the market price of the shares. The risk when trading stock index futures is as big as the profit potential. If the stock price falls (or rises a futures contract put) investment declines rapidly and you will receive a margin call. For example, if the stock drops from Rs. 25 to Rs. 23 per share, your margin money is down and less than the required margin to trade future contract. Then you must add more funds or broker has to close the account. From small price changes have a big effect; it is necessary to control the population on a daily basis, if not more often.
Close the transaction when ready. Very few futures contracts are exercised securities (i.e., the underlying shares purchased and delivered). Instead, transactions are usually settled by buying a futures contract second opposite type (a put option if you are holding a call and vice versa). At the time of maturity, the two contracts are simply canceled out by each other.
In the next chapter, we will discuss the leverage and payoff and their respective impact sin the stock market.
- Tutorial Course - Basics of Futures Trading for Beginners -
» e-Learning Chapter 1: What is Futures Contract and Types of Future Contracts?
» Currently Reading: What is Futures Trade and How to Trade in Future Markets?
» e-Learning Chapter 3: What is Leverage and Payoff? Definition with Example.
» e-Learning Chapter 4: What is Shorting or Short Sale? Definition and Rules.
» e-Learning Chapter 5: What is Nifty Futures and How to Trade in Nifty futures?
» e-Learning Chapter 6: What are Futures Prices? Definition and Effects of Dividends.
» e-Learning Chapter 7: What is Hedging? Examples and Hedging Strategies.
» e-Learning Chapter 8: What is Open Interest? Examples and Analysis.
» e-Learning Chapter 9: What is Margin and M2M (Mark to Market)?
» e-Learning Chapter 10: What is Margin Trading? Advantages and Risk of Leverage.
» e-Learning Chapter 11: What is Hedger, Speculator and Margin Calculation?
» e-Learning Chapter 12: Futures Trading Quiz – Basics of Futures Trading for Beginners.