Futures Trading- Help

#1
Hi Seniors,
This is Ajay.
I wanted to know how actually Futures Trading is done.

With all the knowledge i could gain, I still have some doubts

If i'm bullish on a stock, I buy some stock futures and when the price rises I need to square off to book my profits. Is that right?

And if i'm bearish on a stock, I sell some stock and when the price falls I need to square off to book my profits. Is that right?

Or is it the opposite way? ( sell initially if i'm bullish/ buy initially if i'm bearish and later square off to book my profits)


I also have a doubt regarding some terms such as Going long and going short

Can anyone please help me

Thanks in advance.
Ajay
 

marcus

Active Member
#2
Hi Ajay,

Let me try to answer your questions

1)In the case of futures once you buy a futures contract, and the price goes up there is no need to square off as futures are settled on marked to margin basis so the profit you make will be credited to your account in case you incur a loss the amount will be debited from your account. However you have to maintain a minimum margin, so if you incur a loss and payout is made you will have to transfer money to maintain the minimum margin. So everyday your account is 'marked up' for as long as you do not close (also means square off) your position or till the contract tenure expires.

2)If you're bearish same answer as 1

3)If you're bullish you always buy and if you're bearish you always sell.

4)Basically Long means you buy in the hope of prices rising and short means you sell in the hope of prices falling. In capital market when you're long you buy and when prices go up you sell to book your profit. When you're short actually you sell first, this is done by borrowing the stock from your broker, he gets it from one of his clients, he doesn't need to ask he can do this because you sign the right to hypothecation and rehypothecation for margin accounts, but if you have fully paid for the stock then he needs to ask, he then actually sells the stock in the market and you carry your position for days/months as long as the stock price declines (there are many other rules you have to maintain 50% min margin, you are responsible for all dividends during the period to the lender, you pay interest to the broker and few other rules), then you buy back the stock from the market at a lower price and return it to the broker who in turn returns it to the client he borrowed it from, and you pocket the difference in price as your profit.

This used to be allowed in India but was stopped in 2001 I think, currently you can only go short intraday in the capital segment. On Dec 24 07 I read SEBI planned to reintroduce short selling soon but I haven't heard of any updates on that.

In futures market you don't need to own securities for buying or selling and besides everything is cash settled so going short is possible. Actually is futures market we say short sellng but its actually just selling a contract its not short selling as per the traditional definition (there are no real securities involved)

Hope this helps
 

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