A futures trade can be placed from the Trading terminal of the broker by selecting the desired Stock and the expiry which one needs to buy. Then one should ensure that their account should be adequately funded to take the Long or short position in that particular future. By this one can go Long or Short in any Future contract and square it off after the desired period after which the blocked funds will be realized along with the profit or loss will be adjusted in the traders account.
Future Contracts-
Future contracts are traded the same way as any other Stocks are traded. Futures are derivatives of the Stocks or any other underlying security. Futures are an agreement between the buyer and the seller to exchange the underlying security at a pre-determined price on a Future date.
Future contracts are Bought or Sold when the trader or investor has a directional view of the underlying security. Futures are not like options that can benefit from sideways market conditions. Here a significant price movement is required to earn good profits.
Future Contracts are traded from the Trading terminal of the Broker which you have a trading account. The Derivative segment should be activated in order to place a trade in the Futures segment.
As we know that a directional view is required for taking a position in the Futures and making some profits, hence in this situation, let’s take the example of ITC, which seems to have a Bullish outlook for the upcoming trading session.
To monetize on this view, a Future contract of ITC can be bought for a couple of trading sessions.
Trading Future contracts-
To Trade a Future contract the Following steps can be followed-
- In this case, one has a bullish view on the underlying Stock (ITC), a Future contract can be bought or gone Long.
- First, you will have to go to the broker’s terminal and search for the Future contract that you want to buy or sell. You can just type the Name of the security along with the word “FUT” at the end and that will result in the Future contract of that particular stock. The month has to be chosen until when an individual wants to hold the Contract. If the trade is for one day or a couple of days, you can choose the current month and if you want to hold on to the position for more than 2 months then the 3rd and last month should be selected.
- Now that you have selected the month for which the contract is to be bought, the order type has to be chosen. If you want to square off this position within the day then “Intraday” should be chosen and if you want to carry forward the trade then the “ Normal” type of order has to be chosen.
- Now that the order type is understood, an adequate amount of Funds needs to be present in the trading account in order to fulfill the order.
- Now that all the above steps are followed, you could complete the order in either Market or Limit order and confirm. In this way, you will be able to own a Futures contract easily.
Now in the above way the Futures contract of ITC was bought, there can be 3 scenarios-
- The price of ITC goes up and you make some gain.
- The price of ITC falls below your buying price and you incur some losses.
- The price of ITC doesn’t make a significant move and stays there, so you don’t make or lose any money but you lose on the opportunity cost as the Margin for the Future is blocked in your account until the position is squared off.
Now when you feel to square off the position you can do so easily by exiting the trade by taking the opposite position or just exiting the trade. By this, the trade will be completed and the blocked margins will be unblocked and the Profit or Loss incurred will be adjusted in the total Cash.