Futures Contracts for Beginners: Breaking Down the Basics for Indian Investors

Since their introduction in 2000, futures contracts have become an integral part of Indian financial markets, with the average monthly turnover of the F&O segment touching ₹8,740 lakh crore in March 2024.

For the average retail trader who has traditionally focused on buying and selling stocks, understanding futures trading has become not just an option but a necessity to stay competitive in today’s market. 

Exploring Futures Contracts 

At their core, futures contracts are standardised agreements to buy or sell an underlying asset at a predetermined future date and price. These contracts are available across three major types of futures contracts: equity futures traded on the NSE and BSE, commodity futures primarily on the Multi Commodity Exchange (MCX), and currency futures.

The equity futures segment includes contracts on major indices like Nifty 50 and Bank Nifty, along with individual stock futures. MCX offers futures in precious metals, base metals, energy products, and agricultural commodities. Currency futures allow trading in major pairs like USD-INR, EUR-INR, and GBP-INR. Each contract is standardised with specific lot sizes; for instance, Nifty futures trade in lots of 75, while Bank Nifty trades in lots of 30.

SEBI’s regulatory framework ensures strict trading parameters, including minimum contract sizes, position limits, and margin requirements. For retail traders to participate, they need a trading account with F&O activation and must maintain the required margins as prescribed by their brokers.

Also read: Understanding Options Trading in India: A Beginner’s Guide

Key Differences from Cash Market Trading

The futures market operates quite differently from traditional cash market trading. While cash market traders can buy single shares of companies, futures trading requires dealing in standard lot sizes. Trading hours extend beyond regular market hours for commodity futures with MCX operating until 11:30 PM (up to 11:55 P.M.) for most contracts. This extended trading window allows traders to react to global market movements, particularly crucial for commodity and currency futures.

Settlement cycles in futures differ significantly from cash market trades. While cash market trades settle on a T+1 basis, futures contracts have specific expiry dates, typically the last Thursday of every month. 

The mark-to-market settlement happens daily, affecting the trader’s margin requirements. For instance, if a trader buys one lot of Nifty futures at 22,000 and the index moves to 21,900, they need to pay the mark-to-market loss of ₹5,000 (100 points × ₹50 per point).

Securities Transaction Tax (STT) varies between equity futures and options trading, impacting the overall trading costs. Additionally, futures trades attract brokerage, exchange transaction charges, and GST, which traders must factor into their trading strategies.

Mastering Margin Requirements

The initial margin comprises two components: SPAN (Standard Portfolio Analysis of Risk) margin and exposure margin. 

For example, trading one lot of Nifty futures with the index at 22,000 typically requires a SPAN margin of about ₹2,00,000 and an exposure margin of ₹1,00,000, though these figures vary based on market volatility.

The exchanges impose an exposure margin over the SPAN margin to address risks that the SPAN margin might not be able to cover.

The Path Forward 

Futures trading in India offers opportunities for retail traders to participate in price discovery and risk management. Traders should start with small positions, focus on risk management, and gradually increase exposure as they gain experience.

Traders should also familiarise themselves with their broker’s margin policies and trading platforms. Remember, while FPIs and DIIs often use futures for hedging, retail traders should develop clear trading strategies aligned with their risk tolerance and capital availability.

Although the F&O segment carries considerable risk, especially for beginners, with proper understanding and disciplined execution, futures trading can be a valuable addition to an Indian trader’s investment toolkit.