A futures contract is a type of derivative instrument, or financial contract where two parties agree to transact a set of financial instruments for future delivery at a particular price.
Index Futures : As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. Index futures are futures contracts where the underlying is a stock index (Nifty or Sensex) and helps a trader to take a view on the market as a whole.
Lot size :Lot size refers to the quantity in which an investor in the markets can trade in a derivative of a particular scripts. For Eg-Nifty Futures have a lot size of 100 or multiples of 100.Hence if a person were to buy 1 lot of Nifty Futures , the value would be 100*Nifty Index Value at that point of time.
Similarly lots of other scrips such as Infosys, reliance etc can be bought and each may have a different lot size. Lot sizes are fixed accordingly which will be the minimum shares on which a trader can hold positions.
Expiry period in Futures Trading: Each contract entered into has an expiry period. This refers to the period within which the futures contract must be fulfilled. Futures contracts may have durations of 1 month,2 months or at the most 3 months. Each contract expires on the last Thursday of the expiry month and simultaneously a new contract is introduced for trading after expiry of a contract.
Eg: Let’s say you buy a HPCL Futures contract.
And the price of each HPCL share is Rs180. This will amount to Rs1.17,000 (Rs180 x 650 shares).
You don’t pay the entire amount of Rs1,17,000. 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.
Let’s say the margin for the HPCL Futures is 15%. So you end up just paying just Rs18,550 (not Rs1,17,000).
Profit :-
You purchased a HPCL Futures contract and the underlying price is Rs180 per share.
Let’s say, the next day it moves to Rs182.
The difference is Rs2 per share (182-180)
You get a credit of Rs1300 (Rs2 per share x 650 shares).
This will go on till you sell the Futures contract or it expires (last Thursday of the month).
So, on a daily basis you make money.
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