How to Trade in Futures

How to trade in Futures

January 12, 2006 09:58 IST

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The other day a friend told me that she made a killing trading in Stock Futures.

On asking around, I discovered that many individuals are now trading in Futures, and doing well. 

Here's a primer to how it actually works.

* 3 ways to get rich this year

How Futures work

Buy a contract

When you buy shares, you can buy any number you please, even if it is just one share. In Futures, you buy a contract which will have a specific lot size depending on the stock.

Let's say you want to buy an Infosys [ Get Quote ] Futures contract. This will comprise 100 shares. Or, you want to buy a HPCL [ Get Quote ] Futures contract. This will be a lot of 650 shares.

In Futures, you buy a lot. The lot size is set for each futures contract and it differs from stock to stock.

Margin payment

When you buy a Futures contract, you don't pay the entire value of the contract but just the margin. This margin amount too is prescribed by the exchange.

Let's say you buy a HPCL Futures contract.

And the price of each HPCL share is Rs 311. This will amount to Rs 2,02,150 (Rs 311 x 650 shares).

You don't pay the entire amount of Rs 2,02,150. You only pay 15% to 20% of that amount and this is called the margin amount.

The margin depends on what the exchange sets for the day. Based on certain parameters, it declares the margin for each stock.

So the margin for Infosys will vary from, say, HPCL.

Let's say the margin for the HPCL Futures is 15%. So you end up just paying just Rs 30,322 (not Rs 2,02,150).

How you make or lose money

You purchased a HPCL Futures contract and the underlying price is Rs 311 per share.

Let's say, the next day it moves to Rs 312.

The difference is Rs 1 per share (312 – 311)

You get a credit Rs 650 (Rs 1 per share x 650 shares).

The following day, it dips to Rs 310.

The difference is Rs 2 per share (312 – 310)...