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What is Future Trading / Future Contract ?Understanding Future Contracts: A Comprehensive Guide for Beginners in 2024

What is Future Trading/ Future ContractFutures trading involves contracts to buy or sell an asset at a predetermined price on a specific date in the future. There are several types of futures trading, categorized by the underlying asset, the purpose of the trade, and the strategy used.

In the stock market, after exploring options for making money, another choice is futures trading. In today’s blog post, we will provide you with complete basic information about “What is Futures Trading?” so that you can understand futures trading well.

Futures Trading Kya Hai ? What is Future Trading in Hindi ?

Futures Trading Kya Hai — फ्यूचर ट्रेडिंग (Futures Trading) शेयर बाजार का एक वित्तीय साधन है, जिसमें दो पक्ष (खरीदार और विक्रेता) किसी विशेष संपत्ति (जैसे कि स्टॉक, कमोडिटी, मुद्रा, आदि) को एक निश्चित मूल्य पर भविष्य में एक निश्चित तारीख को खरीदने या बेचने के लिए सहमत होते हैं। इस अनुबंध को “फ्यूचर कॉन्ट्रैक्ट” कहा जाता है।

Types of Future Trading ? (Future Trading ke prakar)

Futures trading can be categorized based on the underlying assets, strategies, and market participants involved. Here are the main types of futures trading:

1. Commodity Futures:

  • Definition: Futures contracts based on physical commodities such as metals, energy products, and agricultural goods.
  • Examples:
    • Metals: Gold, silver, copper.
    • Energy: Crude oil, natural gas, gasoline.
    • Agricultural: Wheat, corn, soybeans, coffee, sugar.

2. Financial Futures:

  • Definition: Futures contracts based on financial instruments, including stock indices, currencies, and interest rates.
  • Types:
    • Stock Index Futures: Contracts based on market indices like the S&P 500, Nifty 50.
    • Currency Futures: Contracts based on currency pairs, such as USD/INR, EUR/USD.
    • Interest Rate Futures: Contracts based on government bonds or other debt instruments.

3. Equity Futures:

  • Definition: Futures contracts based on individual stocks.
  • Example: Futures on companies like Reliance Industries, TCS, or Infosys.

4. Energy Futures:

  • Definition: Futures contracts based on energy products.
  • Examples: Crude oil, natural gas, heating oil.

5. Agricultural Futures:

  • Definition: Futures contracts based on agricultural products.
  • Examples: Wheat, corn, soybeans, cotton, sugar.

6. Metal Futures:

  • Definition: Futures contracts based on metals.
  • Examples: Gold, silver, platinum, copper.

7. Currency Futures:

  • Definition: Futures contracts based on the exchange rates between two currencies.
  • Examples: USD/INR, EUR/USD, GBP/USD.

8. Interest Rate Futures:

  • Definition: Futures contracts based on interest-bearing instruments like government bonds or Treasury bills.
  • Example: 10-year Treasury note futures.

9. Weather Futures:

  • Definition: Futures contracts based on weather conditions such as temperature, rainfall, or snowfall.
  • Purpose: Used by companies to hedge against the financial impact of adverse weather conditions.

10. Hedge Futures:

  • Definition: Futures contracts used specifically for hedging purposes to protect against potential losses in an existing investment or asset.
  • Purpose: Businesses and investors use these contracts to lock in prices and minimize risk.

11. Speculative Futures:

  • Definition: Futures contracts traded with the goal of profiting from price movements in the underlying asset.
  • Purpose: Traders speculate on price changes to make a profit, without necessarily holding the underlying asset.

12. Arbitrage Futures:

  • Definition: Futures contracts used to take advantage of price differences in different markets.
  • Purpose: Traders buy and sell similar assets in different markets to profit from the price discrepancies.

13. Calendar Spread Futures:

  • Definition: Involves buying and selling futures contracts on the same underlying asset with different expiration dates.
  • Purpose: Used to profit from the difference in price movements between the two contracts.

These types of futures trading serve different purposes and cater to various market participants, including hedgers, speculators, arbitrageurs, and investors, depending on their market outlook and risk tolerance.

Key Concepts in Future Trading ( फ्यूचर्स ट्रेडिंग में कुछ प्रमुख अवधारणाएँ )

Futures Contract:

  • A legal agreement to buy or sell an asset (like a commodity, currency, stock, or bond) at a future date for a price agreed upon today.
  • The buyer agrees to purchase, and the seller agrees to deliver the asset when the contract expires.

Underlying Asset:

  • The asset on which the futures contract is based. It can be a commodity (like oil or gold), a financial instrument (like stocks or bonds), a currency, or an index.

Leverage:

  • Futures trading allows traders to control large amounts of an asset with a relatively small amount of capital. This is possible because only a margin (a fraction of the total value) is required to enter the trade.
  • While leverage can amplify profits, it also increases the potential for significant losses.

Expiration Date:

The date by which the futures contract must be settled. On this date, the contract can either be settled through physical delivery of the asset or by a cash settlement where the value difference is paid.

Margin:

The initial deposit required to initiate a futures position, serving as security for the trade. Additionally, there are maintenance margins, which are the minimum funds required to be maintained in the account to keep the position open.

Speculation vs. Hedging:

  • Speculation: Traders may use futures contracts to bet on the direction of an asset’s price. If they believe the price will rise, they might buy a futures contract (go long). If they believe the price will fall, they might sell a futures contract (go short).
  • Hedging: Businesses and investors use futures to protect against price fluctuations. For example, a farmer might sell futures contracts to lock in the price of their crop, ensuring they get a certain price regardless of market fluctuations.

Liquidity:

  • Futures markets are usually very liquid, meaning it’s easy to buy and sell contracts. This liquidity helps ensure that traders can enter and exit positions quickly.

Settlement:

  • Physical Settlement: The actual delivery of the asset occurs at the contract’s expiration.
  • Cash Settlement: The difference between the contract price and the asset’s market price is settled in cash, without any physical delivery of the asset.

Lot Size:

Each stock futures contract has a specified lot size.

For example, if the lot size for Tata Motors is 550, it means that when you buy one lot of Tata Motors futures, you are considered to have bought 550 shares of Tata Motors. Futures contracts are typically available for trading for a period of three months.

For instance, if the current month is January, then futures contracts for January, February, and March will be available for trading.

Why to do Future Trading ? ( फ्यूचर ट्रेडिंग क्यों करते है )

Let’s use Tata Motors with a share price of ₹1100 in the example:

If this month the price of Tata Motors is expected to rise, and you want to capitalize on this, you might consider buying 100 or 200 shares of Tata Motors.

For example, to benefit from this, you would typically need to take delivery of Tata Motors shares. If the price of Tata Motors shares is ₹1100 and you buy 150 shares, you would need to pay ₹1,65,000 and take delivery of the shares.

Now, suppose the lot size for Tata Motors shares is 150 and you need to provide a 10% margin. To obtain this lot, you would need to invest ₹16,500. If Tata Motors shares increase by ₹100 as expected, you would make a profit of ₹10,000.

Let’s understand the profit in terms of percentage:

  • If you had taken delivery of the shares, with an investment of ₹1,65,000, you would have earned ₹10,000 in profit, which is a return of 6.06%.
  • However, if you had bought the futures contract, with an investment of ₹16,500, you would have earned ₹10,000 in profit, which is a return of 60.61%.

Therefore, it is said that futures trading can potentially offer higher profits compared to traditional stock trading. This is the reason, why we do future trading.

Who can do Future Trading? ( फ्यूचर ट्रेडिंग कौन कर सकता है? )

1. Individual Investors:

  • Retail Traders: Individual investors use futures to speculate on price movements or to hedge against potential losses in their investment portfolios. They may trade futures on commodities, stocks, indices, or currencies.

2. Institutional Investors:

  • Hedge Funds: These funds use futures to implement various trading strategies, including speculation, hedging, and arbitrage.
  • Mutual Funds and Pension Funds: They use futures to hedge against market risks or to gain exposure to certain assets or indices without directly buying the underlying assets.

3. Commercial Hedgers:

  • Producers and Consumers: Businesses involved in producing or consuming commodities (e.g., farmers, energy companies) use futures to lock in prices and manage price risk. For instance, a farmer might sell futures contracts to secure a price for their crop ahead of harvest.

4. Speculators:

  • Traders Seeking Profit: These participants use futures contracts to profit from price movements in the underlying assets. They take on the risk of price fluctuations in the hopes of making a profit from favorable price changes.

5. Arbitrageurs:

  • Traders Exploiting Price Differences: Arbitrageurs use futures to take advantage of price discrepancies between different markets or between futures contracts and the underlying assets.

6. Financial Institutions:

  • Banks and Investment Firms: They use futures for hedging purposes or to manage risk exposure in their portfolios. They may also offer futures trading services to their clients.

7. Market Makers:

  • Entities Providing Liquidity: Market makers facilitate trading by providing liquidity in the futures markets. They help ensure that there are always buyers and sellers available, which helps maintain market efficiency.

8. Regulated Entities:

  • Entities Subject to Regulatory Oversight: In many jurisdictions, futures trading is regulated to ensure market integrity and protect participants. Individuals and institutions must adhere to regulatory requirements and standards.

Requirements to do Future Trading ( फ्यूचर ट्रेडिंग करने की आवश्यकताएँ )

  • Account Setup: Participants need to open a trading account with a brokerage firm that offers futures trading.
  • Margin: A margin deposit is required to enter into futures contracts. This serves as a security deposit to cover potential losses.
  • Knowledge and Experience: While anyone can theoretically participate, futures trading involves significant risk and complexity. Participants typically need to have a good understanding of the market, trading strategies, and risk management.

How Futures Trading Differs from Other Financial Instruments:

The primary distinctions between futures contracts and other financial instruments are:

Futures contracts are traded in specific lot sizes.

A futures contract does not possess intrinsic value; its value is based on the underlying asset.

Futures contracts are traded on stock exchanges.

Futures contracts have an expiration date, which is typically the last Thursday of the month.

Also here is the link of Wikipedia of What is Future Contract ? What is Future Trading ? Future trading kya hai —– https://en.wikipedia.org/wiki/Futures_contract

Conclusion: What is Future Trading / Future Contracts

In this blog post, we have provided information about “What is Futures Trading” in the Share Market, what is Future Trading / Future Contract, Types of future trading; Futures Trading Kya Hai ?”

If you have learned something from this blog or article, feel free to share it on social media. If you want to understand the stock market in simple English and read similar blogs and articles, please continue visiting our website, stockmarket-info.com.

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