The world of futures trading in India has been growing rapidly ever since its launch on 12-06-2000. Data suggests that 9.36 crore index futures contracts and 26.56 crore stock futures contracts were traded on NSE in 2021-22.
But wait… You must be wondering what a futures contract is and why so many traders buy and sell it.
Truth is, futures contracts are similar to any agreement you might find in day-to-day life. But the finer details make futures contracts interesting, especially if you’re trying to become a futures trader. Curious? Read on.
Definition of Futures Contracts
A futures contract is an agreement between two parties to buy or sell securities linked to it at a predetermined price and date. Along with the price and date, the quantity of the underlying security is also specified.
Unlike an options contract, stock market futures are both a right and an obligation. That’s why a trader is obligated to take delivery or fulfill the terms of the futures contract on expiry.
In India, futures contracts are traded on NSE, BSE, MCX, and others. As the names suggest, index futures are for indices including (but not limited to):
On the other hand, stock futures are for individual shares of companies including (but not limited to):
The terms futures contracts and futures are often used interchangeably. That’s why when someone says they’re trading Nifty futures, they mean they’re either buying or selling Nifty futures contracts.
Types of Futures Contracts
Futures contracts are not limited to stocks or indices. They’re available for trade on other securities like commodities and currencies too. These securities make up the various types of futures that we’re going to cover.
1. Stock Futures
Stock futures trading involves shares of companies like ICICI Bank, ITC, Asian Paints, and others. Buying or selling a stock futures contract means entering into an obligation to carry out the underlying action for the stock at the predetermined price and date.
2. Index Futures
An index tracks a specific component of the market. For example, Nifty 50 includes fifty of the biggest stocks in India by market cap. Futures of an entire index is known as index futures. Index futures are known to be relatively less volatile than individual stock futures.
3. Commodity Futures
A commodity is any raw material or goods like aluminium, coffee, copper, natural gas, and more. Trading futures on commodities is possible in India. In fact, commodity futures of silver, crude oil, gold, and others are known to be significantly popular amongst traders.
4. Currency Futures
Trading currency futures in India is possible. But, you can buy and sell only certain futures of four currencies in India:
- Euro (EUR)
- Great Britain Pound (GBP)
- Japanese Yen (JPY)
- US Dollars (USD)
That’s not all. Futures trading is available on cross-currency pairs like:
5. India VIX Futures
A VIX or Volatility Index measures the fluctuations of indices like Nifty 50, S&P 500, and others. That’s why it is also called the “Fear Index”. India has its own VIX called “India VIX”.
Also known as Nifty VIX, it measures the volatility of Nifty Index Options. Buying and selling Nifty VIX futures is open to traders.
6. Interest Rate Futures
Interest rate futures involve trading futures of government securities like bonds and t-bills.
In India, you can trade interest rate futures on Government of India Securities that are issued for 6 years, 10 years, and 13 years. The 91-day Government of India Treasury Bill is also open for futures trading.
Futures Contract Example
For example, let’s say that cotton is experiencing rampant volatility. A company that requires cotton for its operations will enter into a futures contract with a cotton producer.
Why? Both companies want to hedge against the volatility of cotton prices in their favor. The seller wants to hedge in the futures market against a decline in price while the buyer wants to hedge against a rise in price.
The components of the futures contract that they enter into will include the:
- Quantity of cotton
- Price of cotton
- Date of delivery
In the real world, these agreements are fairly common but with one variable – retail speculators, traders, and investors. Read the next section to find out the key difference.
Who Trades in Futures Contracts?
The futures trading market is made up of speculators and investors. These personas may be applicable to individuals or companies. Individuals may enter into futures contracts to benefit from price differentials.
They need not always take delivery of the underlying security. Companies may enter into futures contracts to benefit from the price differential.
Or, companies may enter into futures contracts to hedge against unfavorable price movements. This is in case they want to take delivery of the underlying asset. We discussed this in the example before.
Where are Futures Contracts Traded?
Trading index and stock market futures are allowed on exchanges like the NSE, BSE, MCX, and others. Furthermore, not all securities are open for futures trading.
SEBI has approved only 196 securities whose futures contracts you can trade. Getting started is simple. You’ll have to open a futures trading account online with a SEBI-registered broker like Dhan.
The benefits of opening a futures trading account with Dhan:
|Features||Only on Dhan|
|Premium TradingView features for FREE||✔️|
|Live market scanner with over 1,00,000 daily scans||✔️|
|Real-time futures built-up||✔️|
|Easy web login with QR code||✔️|
FAQs on Futures Contracts
1. How does a futures contract work?
A futures contract gives you an obligation to buy an underlying security at a predetermined price and date. Futures contracts deal in what will be the price of a security in the coming months.
Thus, traders look to benefit from the price difference between a security’s current (spot price) and future price while companies look to hedge against unfavorable price swings.
2. What are the types of futures contracts?
|Type of Futures Contract||Characteristics|
|Stock||Futures of shares like ICICI Bank, ITC, Asian Paints, and others|
|Index||Futures of indices like Nifty 50, Nifty Bank, and others|
|Commodity||Futures of commodities like coffee, cotton, copper, and others|
|Currency||Futures of currencies like USD, EUR, etc. or cross-currency pairs like USDINR, USDJPY, etc|
|VIX||Futures of the India VIX index|
|Interest rate||Futures of government bonds and T-bills|
3. Is futures trading legal in India?
Trading futures is legal in India. In fact, you can trade stock, index, commodity, currency, VIX, and interest rate futures on NSE, BSE, MCX, and others. To start trading futures in India, you’ll have to open a trading account.
Disclaimer: This blog is not to be construed as investment advice. Trading and investing in the securities market carries risk. Please do your own due diligence or consult a trained financial professional before investing.