How Futures Really Work: Margin, Leverage and Hidden Risks

CA Manish Singh: 
Hello everyone. In the previous chapter, we learnt what futures are, how futures evolved in the market, and the difference between forward contracts and future contracts. Now that we know futures are exchange traded, let us discuss what this really means. 

When we say exchange traded, it means a particular futures contract is traded on a specific exchange. 

In the Indian context, for example, consider a stock like Reliance. Reliance will also have its own futures contract. The names I am taking are not buying or selling recommendations. These are only examples, and I am choosing large Indian companies so that there is no possibility of manipulation. Do not treat any part of this discussion as advice. Any investment decision must be taken only in consultation with a SEBI registered adviser. 

Why Futures Exist 

CA Manish Singh: 
Assume you hold 250 shares of Reliance. You have a decent holding. Now you feel the market has turned slightly negative and there is a possibility the stock may go down. 

You have two choices: 

1. You can sell the shares.
2. Or, if you do not wish to sell your holding, you can sell the futures contract. 

If the stock actually goes down, you will make a gain in the futures position. 
For example: 

• Reliance share price: ₹1500
• You sell the futures at ₹1500
• The share falls to ₹1400 

Suppose you expect support at ₹120 and you exit your futures position at ₹120. 

Here is what happens: 

• The stock has fallen by ₹100
• You booked the futures exit at ₹120
• So, although the stock fell by ₹100, your futures short helped you recover ₹80 

If you had not hedged using futures, the entire ₹100 loss would have hit your holding. 
Futures allow you to reduce the impact of adverse price moves without selling your actual shares. 

This is the core idea behind futures. They allow direction-based judgement at a lower cost. 

Using Futures for Speculation 

Now consider another scenario. 
You do not hold the stock, but you believe crude prices are rising, retail sales are rising, or Jio has increased tariffs. You think Reliance may go up in the future. 

You want to buy 1000 shares of Reliance at ₹1500 each. That requires roughly ₹1 lakh. 
You may not have ₹1 lakh, or you may not want to deploy that much. 

So, you explore futures. 

Let us check the margin requirement. 
On screen, Reliance is at ₹1522. 

If you want to buy: 

• 500 quantity: margin required ₹7,62,000
• 1000 quantity: margin required ₹15 lakh 

You may not have that much money.  

Now look at Reliance Futures: 

• Add: Reliance July Future
• One lot margin requirement: ₹1,38,000
• For 1000 quantity: margin required ₹2,77,000 

This is much lower than ₹15 lakh needed to buy actual shares. 

This is why most speculators trade futures instead of stocks. 
If the stock price rises, you earn profit on the full 1000 quantity but with a much lower margin. 
If the price falls, losses also apply on the full 1000 quantity. 
Futures amplify both profits and losses. 

Futures on Indices 

Let us take the Nifty 50 index. 

You cannot buy Nifty directly. You can buy: 

• Nifty ETF
• Nifty Futures
• Nifty Options 

Suppose Nifty is at ₹25358. 
The lot size is 75. 

Contract value = 25358 × 75 = approximately ₹17 lakh 

If you try to buy this value in cash, you will need ₹17 lakh. 

But if you trade Nifty Futures: 

• You press buy
• Margin required is only ₹2,24,000 

So a ₹17 lakh contract can be traded with only ₹24,000 of margin. 

This is why futures have become popular. 
They allow higher exposure with lower margin and amplify both profits and losses. 

For example: 
If you have ₹1 lakh, you can trade 300 quantities of Nifty using futures. 
But to buy the same exposure in cash Nifty, you will need ₹60 to ₹65 lakh. 
With futures, you can take that exposure for ₹9 lakh instead. 

Because you pay very little margin for a large contract, both profits and losses grow at the same fast pace. 

Margin Requirements Vary 

• For Nifty and Bank Nifty futures, margin requirement is roughly 15 percent.
• For stable top stocks: 15 to 20 percent.
• For highly volatile stocks: margin can go up to 50 percent. 

Margins change based on volatility and market conditions. 

Summary and Takeaways 

• Futures are exchange traded contracts.
• They allow directional positions with lower margin.
• They help hedge existing holdings.
• They amplify both profits and losses.
• Contract exposure is high, margin requirement is low.
• Margin varies from 15 percent to 50 percent depending on volatility. 

In the next chapter, we will discuss leverage calculation, pay off charts, and how futures amplify profit and loss. We will also understand the practical use of future contracts. 

Disclaimer: 
Investments in securities markets are subject to market risks. Read all related documents carefully before investing.