Understanding Stock Futures and MTM (Mark to Market)

CA Manish Singh 

Hello everyone, and welcome to Chapter 17. 
In the previous chapter, we understood how index futures behave and how movements translate into profits or losses. In this chapter, we will apply the same logic to stock futures. You will learn how futures on individual stocks work, how margin requirements differ from the cash segment, how profits get amplified because of leverage, and what MTM means in day-to-day trading. 

Before we begin, a quick disclaimer that the example used here is not a recommendation to buy or sell any stock. 
Always consult your financial adviser before making investment decisions. 

What This Chapter Covers: Stock Futures, Leverage and MTM 

How Stock Futures Work 

CA Manish Singh: 
If you look at the screen, you will see Reliance and Reliance Futures. We will use this to understand how futures amplify returns. 

When I go to “Create Your Own Strategy” and select Reliance Futures, the system shows the margin requirement. 
For one lot of Reliance Futures, the required margin is shown as ₹1,35,000. 

This margin allows you to take a position of 500 quantities, because the lot size is 500. 

Understanding Leverage 

If you purchase the same 500 shares in the cash segment at the current price of ₹1,520, your total cost becomes: 

500 × 1520 = ₹7,60,000 

In futures, the contract value is the same, but you are only paying ₹1,35,000 as margin. This is where leverage comes in. 

Calculating Gains in Futures vs Cash 

Suppose at expiry, the Reliance price moves from ₹1,522 to ₹1,549. 

That is a gain of ₹27 per share. 

On 500 quantities, the total gain becomes: 

₹27 × 500 = ₹14,000 

The return comparison: 

• Futures: ₹14,000 profit on ₹1,35,000 margin 
  ≈ 10% return
• Cash segment: ₹14,000 profit on ₹7,60,000 
  ≈ 1.84% return 

This is why futures amplify returns. The same price movement gives you nearly ten times the percentage return compared to holding the stock. 

But remember, this works both ways. 

Losses Get Amplified Too 

If the price falls from ₹1,522 to ₹1,500, the loss on 500 quantities is: 

₹22 × 500 = ₹11,000 

In futures, that becomes roughly minus 10 percent as well. 
In the cash segment, the percentage loss remains very small. 

Futures offer higher return potential, but with higher risk. 

What is MTM (Mark to Market)? 

CA Manish Singh: 
This ₹14,000 gain that we calculated is based on the expiry price. But expiry may be 20 days away. The contract will still gain or lose value every day. 

For example: 

If today your position shows ₹500 profit, your MTM is ₹500. 
If it shows ₹500 loss, your MTM is minus ₹500. 

Mark to Market (MTM) means the daily gain or loss compared to your entry price at the current moment. 

Your MTM keeps updating with every tick. 

Why MTM Matters 

If your MTM goes into loss, you must maintain that loss amount as free balance in your trading account. Only then will your broker allow you to continue holding the position. 

If your losses exceed your available balance, your broker is permitted to square off your position. This is included in your KYC and risk disclosure. 

Example 

For Reliance Futures: 

You took a position by paying ₹1,35,000 margin. 
If the stock falls enough to create a ₹1,35,000 MTM loss, your entire margin would get wiped out. 

If you do not add more funds, your broker can square off your position to prevent further losses. 

This is how MTM operates in the futures market. 

Summary and Takeaways 

• Stock futures require margin, not full capital.
• A movement from ₹1,522 to ₹1,549 results in ₹14,000 profit for one lot.
• This gives a 10 percent return on the futures margin but only 1.84 percent in the cash segment.
• Losses get amplified the same way as profits.
• MTM tracks daily profit or loss and must be funded to keep the position open.
• If MTM losses exceed available funds, the broker may square off the position. 

In the next chapter, we will understand key market terminologies used throughout futures trading. 

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