What is futures

Futures are a fundamental part of derivatives trading in the Indian stock market. They allow investors to buy or sell an asset at a predetermined price at a future date, providing a hedge against price volatility. In this guide, we will explore the concept of futures, how they work, and their significance in the Indian market.

What Are Futures Contracts?

A futures contract is a standardized legal agreement to buy or sell an asset (such as stocks, commodities, or currencies) at a predetermined price at a specific future date. These contracts are traded on stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in India.

Key Features of Futures Contracts:

1. Standardization: Futures contracts are standardized in terms of the quantity, quality, and expiration date of the asset.
2. Leverage: Futures trading allows investors to control large amounts of the underlying asset with a relatively small initial margin.
3. Mark-to-Market: Daily adjustments to the contract price are made based on market movements.

Historical Overview of Futures Trading in India

Futures trading in India began in June 2000 with the introduction of index futures on the NSE. This marked the beginning of derivative trading in the country. Over time, the market expanded to include stock futures, currency futures, and commodity futures.

The Indian futures market has seen consistent growth, driven by factors like increased market awareness, improved technology, and regulatory support from SEBI.

Table 1: Key Milestones in Indian Futures Market

Year	Event
2000	Introduction of index futures
2001	Launch of individual stock futures
2008	Introduction of currency futures
2018	Introduction of commodity options trading

How Do Futures Work?

Futures contracts require two parties: the buyer (long position) and the seller (short position). When entering into a futures contract, both parties agree on the price and date for future delivery.

Here is a breakdown of how futures work in practice:

1. Initial Margin: To enter into a futures contract, both the buyer and seller are required to deposit an initial margin, which is a small percentage of the contract’s value.
2. Mark-to-Market Adjustments: Each trading day, the contract’s price is adjusted to reflect the current market price. This process is called “mark-to-market.”
3. Expiration and Settlement: Futures contracts can either be physically settled (delivery of the asset) or cash-settled (payment of price differences) at the expiration date.

Why Trade Futures?

Futures trading offers several advantages, including leverage, liquidity, and the ability to hedge against risk. Here are some common reasons investors trade futures:

• Speculation: Investors can take advantage of price movements without needing to own the underlying asset.
• Hedging: Futures allow businesses and investors to lock in prices to protect against unfavorable market movements.
• Leverage: Since only a margin is required to enter a trade, futures enable higher returns on smaller investments (though risks are equally magnified).

Table 2: Common Futures Contracts in India

Type	Underlying Asset	Exchange
Stock Futures	Individual stocks	NSE, BSE
Index Futures	Nifty 50, Sensex	NSE, BSE
Currency Futures	USD/INR, EUR/INR	NSE, BSE
Commodity Futures	Gold, Silver, Crude Oil	MCX, NCDEX

Types of Futures Contracts

1. Stock Futures: These involve buying or selling the stock of an individual company at a future date.
2. Index Futures: Based on stock market indices like the Nifty 50 or BSE Sensex, these contracts provide exposure to the broader market.
3. Currency Futures: Allow investors to trade in currency pairs, such as the USD/INR or EUR/INR.
4. Commodity Futures: Focused on physical commodities like gold, silver, crude oil, and agricultural products.

Historical Data of Futures Performance

Over the last decade, futures trading in India has expanded significantly in volume. One of the most traded contracts is the Nifty 50 futures, which provides exposure to the top 50 companies on the NSE.

Table 3: Nifty 50 Futures – Historical Performance (2020-2023)

Year	Contract Value (INR)	Average Daily Volume (Contracts)
2020	10,500	1,200,000
2021	12,300	1,350,000
2022	14,200	1,400,000
2023	15,500	1,500,000

The Role of SEBI in Futures Trading

The Securities and Exchange Board of India (SEBI) is responsible for regulating futures trading in India. SEBI ensures that the market operates fairly, with transparency, and without manipulation. Over the years, SEBI has introduced several measures, such as tightening margin requirements and improving settlement systems to safeguard investors.

Futures vs Options: Key Differences

While both futures and options are derivative instruments, there are some important differences between the two.

• Obligation vs Right: Futures contracts impose an obligation on both parties to fulfill the contract, while options give the buyer the right, but not the obligation, to buy or sell.
• Risk: Futures expose both parties to unlimited risk, whereas options limit the buyer’s risk to the premium paid.
• Initial Cost: Futures require an initial margin, which is typically less than the premium for an options contract.

Table 4: Comparison of Futures and Options

Criteria	Futures	Options
Contract Type	Obligation to buy/sell	Right to buy/sell
Risk Exposure	Unlimited	Limited to premium
Initial Cost	Margin deposit	Premium payment

How to Start Trading Futures in India

To trade futures in India, follow these steps:

1. Open a Trading and Demat Account: You will need a trading account with a brokerage firm to access the futures market.
2. Complete KYC Process: Submitting your KYC (Know Your Customer) documents is essential before trading.
3. Deposit Margin: You need to deposit the initial margin required by the exchange.
4. Place a Futures Trade: You can either buy or sell futures contracts based on your market outlook.
5. Monitor Mark-to-Market: Keep an eye on daily mark-to-market adjustments to maintain your position.

Risks Involved in Futures Trading

While futures trading can offer significant returns, it also carries substantial risks:

1. Leverage Risk: The high leverage in futures can amplify both gains and losses.
2. Market Risk: Futures are highly sensitive to market volatility.
3. Liquidity Risk: Some futures contracts may not have sufficient liquidity, making it difficult to exit positions.
4. Margin Calls: If the market moves against your position, you may be required to deposit additional funds (margin call) to maintain your position.

Conclusion

Futures trading in the Indian share market provides a flexible and efficient way for investors to hedge risk, speculate, or diversify their portfolios. However, it is important to approach futures with a clear understanding of the risks involved, as well as the necessary market knowledge.

By analyzing historical data and understanding how futures work, investors can make informed decisions and potentially enhance their financial outcomes in the ever-evolving Indian share market.