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Business News/ Money / Demat Account: What is futures trading and how does it work? MintGenie explains
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Demat Account: What is futures trading and how does it work? MintGenie explains

Derivatives trading: To trade futures, ensure your demat account is enabled, understand futures contracts and margin requirements, choose a brokerage platform, fund your trading account, place orders according to your strategy, monitor positions closely, and be aware of the risk of capital loss.

Derivatives trading: Although futures trading demands minimal margin, it entails significant risk. If a trade moves against you, there's a possibility of losing your entire capital. Moreover, such a capital loss can occur within a single trading day. (iStock)Premium
Derivatives trading: Although futures trading demands minimal margin, it entails significant risk. If a trade moves against you, there's a possibility of losing your entire capital. Moreover, such a capital loss can occur within a single trading day. (iStock)

Derivatives trading: Derivatives trading is the buying and selling of financial contracts whose value is determined based on the price of an underlying asset, like stocks, commodities, currencies, interest rates, or market indices. These contracts or derivatives are options, futures, forwards, and swaps.

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Derivatives represent the most actively traded segment in the Indian stock market, boasting significant volume when compared to the cash segment. This heightened trading activity can be attributed to several factors, including the allure of derivative trading among young investors in India.

Derivatives trading has garnered considerable attention from young investors due to its distinct advantages. Unlike the cash segment, derivative trading requires relatively less capital investment while offering exposure to controlling a larger quantity of volume. 

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Furthermore, derivative trading provides opportunities for leveraging investments, enabling investors to amplify their potential returns through the strategic use of borrowed funds. 

Derivatives were initially introduced to protect farmers from the risk of price fluctuations in agricultural products. Over time, the concept of derivatives expanded to include various asset classes such as stocks (equity derivatives), precious metals (non-agricultural commodities), currencies (currency derivatives), and interest rates (interest rate derivatives).

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Also Read: Can you link multiple trading accounts to your demat account? MintGenie answers

In this article, we will explore how to use a demat account for futures trading, an essential product in the realm of derivatives.

Understanding futures

Futures in derivatives are financial contracts that obligate the buyer to purchase (or the seller to sell) an asset, such as a commodity or a financial instrument, at a predetermined price and specified future date. 

These contracts are standardised and traded on organised exchanges such as NSE and BSE. The buyer of a futures contract is agreeing to buy the underlying asset at a specified price on a specified future date, while the seller is agreeing to sell the asset at that price on the specified date. 

Also Read: Demat Account: Benefits of handling mutual fund investments through demat

Futures contracts are used by investors and traders to hedge against price fluctuations, speculate on future price movements, and gain exposure to various asset classes.

How to use demat account for futures trading?

Verify Permissions: Ensure that your demat account is enabled for trading in the futures segment. If you're unsure, contact your brokerage firm or check your account settings online.

Also Read: Demat Account: All you need to know about off-market transfer

Understand Futures Trading: Familiarise yourself with how futures trading works, including the concept of futures contracts, margin requirements, expiry dates, and settlement procedures.

Choose a Brokerage Platform: Log in to your brokerage platform or trading terminal provided by your broker. Make sure that the platform offers access to the futures segment of the stock exchange.

Fund Your Trading Account: Ensure that you have sufficient funds available in your trading account to meet margin requirements for futures trading. You may need to transfer funds from your linked bank account to your trading account if necessary.

Also Read: Demat Accounts: How to operate them through mobile apps?

Place Orders: Once your trading account is funded, you can start placing orders for futures contracts. Specify details such as the contract expiry month, quantity, and price (if applicable). You can place orders for buying (long) or selling (short) futures contracts based on your trading strategy.

In futures trading, it's important to note that you can't buy a specific number of shares as you would in the cash segment. Instead, you are required to buy in lot sizes, with each stock having a different lot size. Additionally, not all stocks listed on the stock exchanges are part of the derivatives segment.

Monitor Positions: Keep track of your open positions and monitor market movements closely. Futures prices can fluctuate rapidly, so it's important to stay informed and react promptly to changes in market conditions.

Risk of Capital Loss: Although futures trading demands minimal margin, it entails significant risk. If a trade moves against you, there's a possibility of losing your entire capital. Moreover, such a capital loss can occur within a single trading day.

Also Read: Demat Account: What precautions should you take while using it?

FAQs

Can I utilise leverage trading in derivatives?

Yes, leverage is commonly employed in derivative trading. Derivatives such as futures and options contracts enable traders to control a sizable position in the underlying asset with a relatively small amount of capital, thereby providing leverage. However, trading derivatives with leverage also carries significant risks, as losses can exceed the initial investment.

Traders should be aware of the risks involved and use leverage responsibly when trading derivatives.

Does futures trading require extensive experience?

Yes, futures trading often necessitates a certain level of experience and understanding of market dynamics due to the complex nature of derivative products. Traders are advised to thoroughly educate themselves and gain practical experience before engaging in derivative trading.

Why are futures prices higher than spot prices?

Futures prices are often higher than spot prices due to factors such as the cost of carrying, interest rates, storage costs, and market expectations of future price movements. This phenomenon, known as contango, incentivises investors to sell futures contracts at higher prices to compensate for the additional costs associated with holding the underlying asset until the future delivery date.

Can I engage in futures trading without a demat account?

No, a demat account is essential for engaging in futures trading in India. A demat account serves as an electronic repository for holding and transferring securities, including derivative contracts. It facilitates seamless settlement and enables investors to track their derivative holdings and transactions conveniently.

Do I need to maintain a minimum balance of securities in my demat account?

No, there is no requirement for a minimum balance in your demat account as prescribed by the depositories (NSDL and CDSL). You can maintain a zero balance in your demat account.

 

 

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Published: 26 Apr 2024, 05:20 PM IST
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