Partner With Us NRI

Open Free Demat Account Online with ICICIDIRECT

5 Things to Know About Futures Trading

We have all heard of various terms being used in the world of investing. Futures and options are among those that are frequently used.

However, while people know about the terms ‘Futures’ and ‘Options’, most don’t know enough about them and therefore consider them to be esoteric practices.

While futures and options are commonly seen together, in this blog, we will specifically go over things that one should know about before trading in futures.

To understand what futures are, let's first understand what derivatives are.

Just like one can invest in shares, bonds, mutual funds, etc., which are known as financial instruments, derivatives are also another type of financial instrument that one can invest in just like the other types of instruments.

These derivatives, as the name suggests, are instruments that derive their value from another financial product or asset which is termed as an ‘Underlying Asset’.

The underlying asset can be anything such as a currency, stock, commodity, etc.

Derivatives are broadly of 4 types:

  1. Forwards                 2. Futures               3. Options               4.Swaps


Coming to futures, futures is essentially an agreement between two parties, not known to each other, for buying and selling something at a specific price and a specified time in the future. This involves one party wanting to buy that underlying asset being traded, and one wanting to sell, at the end of that period, for the decided price.

A futures contract is usually used to speculate the price of the asset being traded or hedge your positions in that asset.

 So as for this blog, we dive into futures and cover what one must keep in mind before investing in the futures market.

  1. Predetermined date and price

As discussed above, the contract is based on a specific time and price which cannot be altered.

This means that if Ram and Shyam want to get into a futures contract with each other, none of them can carry the position beyond the expiry date of the contract at their convenience. The expiry date of the futures contract in case of stock futures is the last Thursday of the month.

Let’s say Ram is making a profit at the end of one week while the contract duration is a month, Ram can decide to square off the contract at that time with other users on the stock exchange while Shyam can carry his position till expiry.

  1. Expiry period

Remember the duration of the contract we spoke about? That’s also called the expiration period of a contract. The contract ends as per the duration of the contract.

With respect to the timeline considered in futures trading, there are 3 terms used, ‘Near’, ‘Next (or ‘Mid’), and ‘Far’.

These refer to the 3 months from the present. The ‘Near’ month is the present month, the ‘Next’ month is…..well, the next month, and the ‘Far’ month is the one after that.

  1. Obligation not a right

In a futures contract, the contract between the two parties is agreed upon mutually. This makes it a legal agreement between the two parties. This means that if Ram and Shyam enter a futures contract, and Shyam realizes that he stands to lose money at the end of the decided period, he will have to pay the difference (i.e. the money he lost) and cannot get out of the transaction.

Therefore, it is wise to study your decision before entering into a futures contract since the contract is an obligation, and not a right.

  1. Buying happens in lots and not in terms of the number of shares

The contracts are not as per a loose count of the entity. It’s not like shares in the market of which we can even buy just one share of an individual company. Futures contracts take place for what we call ‘lots’. And yes, sometimes a ‘lot’ is a lot. These lots consist of a predetermined quantity of that entity being traded. Therefore, one must consider the size of the lot and lot value (Lot size X Price) and analyze the financials as well as the risk-taking capacity based on the lot value as well. Lot value of a futures contract for stock or index futures is a minimum of Rs. 5 lakh.

  1. Cash-based vs Delivery based settlement

So what happens at the end of the contract duration and in between the contract period?

To avoid any default risk, both parties need to deposit a certain margin with the stock exchange. In addition, both parties also need to settle their profit and losses daily, known as Mark to Market (MTM) settlement.

In a cash-based settlement, at the end of the contract period, both parties settle the difference in cash, with one party losing money and one gaining. That difference in money is debited from one party and credited to the other.

Whereas in a delivery-based settlement, let’s say Shyam has a buy position and he does not square off his position, he will have to take delivery of the decided quantity of the underlying shares, i.e. agreed quantity of shares will actually be transferred to his demat account post which he will have to sell it in the open market if he wishes to encash.

In the case of Index futures like Nifty futures, delivery based settlement is not allowed.

 Key Takeaways:

  1. Futures contracts are binding in nature once agreed upon. You are obliged to pay the losses, if any, once you enter into a contract. Similarly, in case of gain, you are entitled to receive the profit from the other party.
  2. Futures contracts are only available for periods of 1 month, 2 months and 3 months.
  3. To avoid any default risk, both parties need to deposit a certain margin with a stock exchange and need to settle their daily profit and losses.



ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. Investments in securities market are subject to market risks, read all the related documents carefully before investing. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The securities quoted are exemplary and are not recommendatory. The contents are solely for informational and educational purpose.

Most Popular

  • 13 May 2022
  • ICICI Securities

The Five-Point Financial Planning Checklist For Your Family

Whether you just got married or planning to have a baby or have dependents, you should have financial plans for every stage in your life to ensure a secured future for your family members. Here are five things you can do financially for your family.   

  • 12 May 2022
  • ICICI Securities

What is a Zero Coupon Bond?

You get fixed returns in the form of interest until maturity when you invest in a bond. Zero-coupon bonds work a little differently. In this article, find out what zero-coupon bonds are, their advantages and whether you should invest in them. 

  • 12 May 2022
  • ICICI Securities

What are Cross Currency Pairs?

The forex market is the largest financial market globally. Currency trading is a lucrative and booming business. While most currencies trading happens in relation to the US Dollar, some don’t. That forms the basis of cross currency pairs. Here’s what you need to know about it. 

  • 12 May 2022
  • ICICI Securities

Investing principles from Benjamin Graham: The Father of Value Investing

Benjamin Graham was a British born economist, professor, and investor who taught at Columbia University. He was also a mentor to some of the most famous investors of the 20th century, including Irving Khan, John Templeton, & Warren Buffett. Buffett called him "the second most influential figure in his life, only after my father". 

  • 12 May 2022
  • ICICI Securities

How to Invest in Nifty 50?

The Nifty 50 is the benchmark index of the National Stock Exchange. It represents the 50 largest companies listed in India. Investing in the Nifty 50 can be a good idea for those looking to make index-linked returns. Here’s how you can invest in the index. 

  • 12 May 2022
  • ICICI Securities

Investment philosophy of Cathie Wood: The most powerful woman on Wall Street

Catherine Duddy Wood, also called Cathie Wood, is an investor who primarily invests in disruptive technologies and is the founder, chief executive officer, and chief investment officer of ARK Investment Management, LLC, an investment management firm mostly active in the United States.

  • 11 May 2022
  • ICICI Securities

How to Use Technology to Improve Your Finances

Technology has made life simpler for everyone. In the realm of personal finance, technology has streamlined many processes—from budgeting to automating your payments. On National Technology Day, let’s look at how technology has transformed our finances. 

  • 11 May 2022
  • ICICI Securities

How to Invest in your Every Goal with Mutual Funds?

Each of us is unique. We have different needs and goals in life. Some of us can ride along swinging markets, while some may need a relatively conservative investment tool. 

  • 11 May 2022
  • ICICI Securities

Four Reasons Why Entrepreneurs should Invest in Equity Mutual Funds

Equity mutual funds provide growth opportunities not just for individual investors but also for entrepreneurs and corporates. They make excellent investments for anyone looking for wealth creation. This article will give you four reasons why businesspeople should consider investing in equity mutual funds.