5 doubts about the Futures Market

#1
Hey,
I've been doing some Equity(Cash) trades for some time and am looking into the Futures market. However, I have not done Futures trading in whatever capacity till date. I will learn as I go and will not jump into it fast. Will start with small amounts first. But I need some things to be cleared up.

So as I understand it, there are Lots for some permitted stocks in Futures market and the no. of shares per lot(say X) varies from company to company. When we buy 1 lot, if the stock goes up by 1 Rupee, I get Rs. X profit. Am I right up until now?

Now, also the one of the benefits of buying a contract for 1 lot of X shares in Futures as opposed to buy X shares in the normal Equity market is that we don't have to pay the full amount but only 15-20%.

So

Doubt No. 1) What happens when we buy 1 lot(say, 500 shares) of Futures contract worth Rs. 100 per share(total value Rs. 50,000) and then the value goes down to Rs. 70? When I sell this, I lose money(Rs. 30/share = Rs. 15,000). But where was the money in the first place? I haven't deposited the full amount yet because I needed to pay only 15-20%(~10,000) of the actual amount to buy this Futures contract. How much time will the brokerage give us to pay it back? And how will they get that money if someone flees due to the huge losses? Do we have to deposit the full amount first anyway but they only reduce 15-20% from the margin? Is there some sort of collateral or other terms? Not that I'll flee.:lol: Just to know what they have power over.

Doubt No. 2) Are the Futures shares completely separate from the Equity shares? That is, if I buy 1 lot containing 500 shares of XYZ company, and want to sell it, will my shares be sold in the Equity(Cash) market to many different people? Or does someone else somewhere have to buy a Futures contract of XYZ company for me to sell it and get the profit/loss?

Doubt No. 3) Can I sell the Futures contract any time between buying it and the 1/2/3 months pre-fixed time period? Or can I sell ONLY on the expiry date? I can sell at any time, right? Because how can Intraday Futures trading be possible otherwise? I can buy 2 lots of XYZ and sell the next minute or the next day or week or even just before expiry, any time I want? Square-off occurs only on Expiry date and not any time before it?

Doubt No. 4) If I am losing money a few days before Expiry date, can I sell the contract for say Rs. X and then buy another contract at/around Rs. X for another 3 months or something, effectively "renewing" the contract, but with someone else, enabling me to wait longer so that I can make a profit?

Doubt No. 5) So basically, Futures is like Equity except 3 things:
i.) Fixed no. of shares/lot and you have to buy in lots
ii.) Pay only a % of total amount and with lower brokerage
iii.) Fixed time period beyond which the contract will expire and be squared off


So these 5 doubts are there now. Please help me clear these. :)


EDIT: BTW, do enlighten me about some other things I may not have covered above. I want to know new things about Futures as well, not just clear these doubts. ;)
 
Last edited:

sanjosedesi

Well-Known Member
#2
Alright, I may not answer your questions in the same sequence as you asked, but hopefully this will cover it.

You pay a different amount of margin on different scrips. You might pay only 11% margin on Nifty because it is less volatile, and I have seen numbers higher than 20% for some volatile scrips. The brokerage charges you mark to market amount every day, so if you lose money, they reduce your account by the loss, and if you gain money, they increase your amount. So it can not come to them as a surprise that your contracts are worthless unless it fell more than the margin percentage in a single day. That is ... if Nifty fell by 11%, or if stock A fell by 17% or stock B fell by 21%. If that happens ... they will have much bigger liability if you do not pay. Any decrease below that level ... you actually need to square it off the same day as the trading day as futures settlement is same day. Depending on what your contract is with your broker, and depending on how your relationship is with the broker, you might get an extra day or 2 to square the margin needs, but when they deem fit, they can liquidate the holdings in the account to meet the mark to margin requirements.

You can buy futures any time and sell them any time, at least in India. You can "roll them over" from one month to another any time. You can roll over to next month, or you can roll over to next + 1 month. If you look at the trading volumes, generally the current month is most active, the next month is half as active (just in the manner of speaking) and the 3rd month is barely active so people usually roll over to the next month.

Futures are "in essence" a contract to buy or sell equivalent number of equity shares on expiry, but in reality they are marked to market and your account debited or credit with the DELTA on expiry. Since the mark to market is happening everyday, this is just the mark to market for the last trading day of the futures cycle.

Also, futures have low expenses if you are holding them for a short period. The brokerage is usually lower, there is no (very small) STT. But you end up paying higher tax (full rate income tax) than a reduced 10-20 % tax for cash segment.

And no, you do not have to deposit the full money for buying a futures contract, but depending on your account limits, you may be able to buy only up to some reasonable limit. For example, if you have 1 Lacs in the account, you can technically buy 3 Nifty futures (approx, have not calculated), but that's about 9 Lacs, and the brokerage may not allow you to buy worth 9 lacs, but only upto 5 lacs. That way they control their risk. Check with them on what these limits will be.
 

sanjosedesi

Well-Known Member
#3
A futures contract is 1:1. It will not be split and sold to 10 different people. If you sell a future contract, someone else is buying that future contract.

One aspect about futures is the 'premium'. Futures prices will rarely be equal to the spot prices. They might be higher reflecting markets optimism, or lower reflecting markets pessimism.

Dividend affects futures price. If a company is going to issue dividend, the stock price will change on the ex-dividend date to reflect this. However, since futures for next month have already discounted that, you will find them lower. Now whether the next month future is lower because of market pessimism or dividend is for you to find out. I have personally seen it but never dug deep to see if the current month future changes on or after the ex-dividend date.

Yes futures have specific lot size, and you can trade only that. And as you said, if the lot size is 50 (like Nifty) and Nifty moves up by 1 INR, you make INR 50 (per lot). And if Nifty falls by 1 INR, you lose INR 50 (per lot).

The exchange revises futures lot sizes once in a while (maybe every quarter) because they want a minimum of 2 Lacs per contract. They might increase the lot size if stock tanks and they might decrease the lot size if stock moves up significantly (becoming a 4-5 lac lot). I think this link should give you that information ... it seems current.

http://www.nseindia.com/content/fo/fo_mktlots.csv

Alright, that's it from me about the basics of futures. If you have further questions, leave a comment.
 

SavantGarde

Well-Known Member
#4
Morkeus,

I am not going to take your illustrations to clear doubts..... but I am just going to write... & write... Hopefully most of your Doubts & their respective numbering will be cleared.....!!!

Let's suppose you have 1,00,000=00 in your F&O Ledger
What you have termed as 15-20% Deposit is actually called 'Margin'
Margin consists of 2 components, 1) Initial Margin/Span Margin 2) Exposure Margin
Both are calculated as percentages of the Total Value of the Contract
Here, I shall not get into the nitty gritty of the Initial Margin & Exposure Margin..... for purpose of calculation and illustration we shall refer to them as 'Total Margin'

Let's illustrate a Trade.....
Opening Ledger Balance: 1,00,000=00
You BUY 1 Lot of ABC @ 100=00
1 Lot in this case = 1000 shares
Total Margin Requirement is 20,000=00

For ease of understanding we shall keep Brokerage & Mandatory Charges out of the picture....Okay

Let's say it closes at exactly the same price of 100=00 on the day of entry.

This is how your Ledger & Client Summary will look for next day....

Opening Ledger Balance 1,00,000=00
Less Total Margin for 1 Lot ABC @100=00 20,000=00
Ledger Balance 80,000=00

Opening Ledger Balance for the Next Day is 80,000=00
Let's say you do nothing and the price closes up by 5 bucks @ 105=00
Your Ledger & Client Summary will look something like this

Opening Ledger Balance 80,000
Mark To Market Gain 5000=00
Balance 85000=00
Margin on ABC 20,000=00

Next Day ABC closes @ 95=00

Your Ledger & Summary will read as follows:
Opening Ledger Balance 85,000=00
Mark To Market Loss 10,000=00
Balance 75,000=00
Margin on ABC 20,000=00

from the above you will understand depending on your daily gain or loss, same is reflected in the ledger at the end of the day.

It is a greatest misunderstanding, can't even begin to emphasize the point enough times.... is that.... Just because one has enough Margin Money to take a position... It should not be Done & It will never be enough... & It will always Backfire badly..... Therefore one must maintain sufficient Ledger Balance to take care of the Daily MTM loss that maybe incurred.... in the absence of maintaining sufficient balance.... Your Broker will not hesitate to Liquidate your Position....!!!

Exiting the current series to buy the next series is actually called Rolling Over

SG

P.S.: Did I mention.... I hate Typing...:)
 

adityasaraf007

Well-Known Member
#7
80 mins. per word.....!!!

SG
In that case, you hit the Submit Button too early.... That post of yours should have been submitted on the evening of 13th March.....

PS: You again hit the reply button too early..... I changed the color you LOVE...
 

adityasaraf007

Well-Known Member
#10
See the problem with young boys.... these days ....jumping to conclusions....!!!

I didn't type.....:)


SG
Okay.... Then, there are two possibilities:

1. You used a Speech Recognition Program.... This would require a little bit of manual typing..... So, this option becomes redundant......

Or

2. You did a Copy-Paste Job...... Again there are two possibilities:
(a) You copied it from somewhere else available on internet..... But since you didn't mention any credit..... So, this also becomes redundant....
Or
(b) You have earlier replied to such post.... And have again reproduced the same over here.... This seems to be the correct possibility....


Disclosure: We have ignored many other possibilities for the sake of simplicity..... ;)
 

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