Stock and Index Futures: A Complete Guide for Smart Trading

Understanding Futures in Trading 

Before diving into stock and index futures, it’s essential to understand what a future means in the financial context. Simply put, a future is a contract that obligates a buyer or seller to transact an asset at a predetermined price on a set date in the future. 

Futures Are Derivative Instruments 

Futures are a type of derivative instrument, meaning their value is derived from an underlying asset such as gold, agricultural commodities, or equities. Here's a simple analogy: 

• Think of a newspaper priced at ₹5. Its price reflects not just the cost of newsprint but also the value readers ₹and advertisers ₹assign to it. 

• Similarly, a futures contract draws its value from an underlying asset like the share price of a company. 

Stock Futures: How Do They Work? 

Imagine you expect a particular stock to perform poorly in the short term. You don’t own the stock, but you still want to capitalize on this view. In the spot market, the best you can do is avoid loss by not buying. But with stock futures, you can profit even from falling prices. 

How a Futures Contract Works in India: 

There are three parties involved: 

1. The buyer 

2. The seller 

3. SEBI (acting as a counterparty to ensure contract enforcement) 

Let’s say: 

• You have ₹1,00,000 to invest. 

• You want to invest in Reliance Industries, trading at ₹2,500. 

• With ₹1,00,000, you can buy 40 shares. 

• If the price rises to ₹3,000, your profit is ₹500 × 40 = ₹20,000. 

Alternatively, you buy Reliance futures at ₹2,650, and each futures contract has a lot size of 250 shares. 

• Contract value = ₹2,650 × 250 = ₹6,62,500 

• You don’t need to pay the full amount just the margin (say, 15%) = ₹99,375 

If Reliance rises to ₹3,000: 

• Profit = ₹500 × 250 = ₹125,000 

• This is over 100% return on your ₹99,375 margin 

What Happens if the Stock Falls? 

Let’s reverse the situation: 

• Seller shorts Reliance futures at ₹2,650 

• Stock drops to ₹2,350; futures fall to ₹2,400 

• Seller buys back and profits: ₹250 × 250 = ₹62,500 

This is known as shorting earning profits when a stock's price falls. 

However, if the stock rises instead: 

• Buyer earns profit 

• Seller incurs loss of ₹99,375 

Since futures are binding, the seller is compelled to deliver or settle the contract much like promising apples for a future price, even if the market doesn’t go your way. 

Key Benefits of Stock Futures 

• Lower Capital Requirement 
 Trade high-value stocks by paying only a margin 
• Leverage Higher Returns 
 Small capital can yield significant gains 
• Short-Selling Opportunity 
 Profit even when prices decline 
• Low Commissions 
 Lower transaction costs compared to buying equities outright 

What Are Index Futures? 

Index futures function similarly to stock futures, but instead of individual stocks, the underlying asset is a stock market index. The margin requirements for index futures are generally higher due to the larger value of the indices. 

Popular Index Futures in India: 

• S&P BSE Sensex – Comprising 30 top companies 
• Nifty 50 – Top 50 companies listed on NSE 
• Nifty IT – Index focused on Information Technology stocks 
• Nifty Bank – Includes top-performing banking stocks 
• S&P BSE Bankex – Banking sector stocks from BSE 
• S&P BSE Sensex 50 – Expanded version of the Sensex with 50 companies 
 

Where Do Index Futures Fit in a Trading Strategy? 

Index futures offer a convenient way to gain exposure to an entire sector or the overall market without selecting individual stocks. 

They’re especially useful when: 

• You want to bet on a sector’s performance (e.g., banking or IT) 

• You aim to hedge your portfolio that’s heavily weighted in a particular sector 

For example, if your portfolio includes several IT stocks, and you foresee a downturn in the IT sector, you can sell Nifty IT index futures. This can offset potential losses, much like an insurance policy for your investments.  

Conclusion 

Futures whether stock or index are powerful instruments. They offer the potential for high returns, but they also carry high risk. A well-planned strategy using m.Stock’s futures platform can help mitigate risks, hedge portfolio losses, or even profit from a market downturn. 

Points to Remember 

• Futures are derivative contracts that bind the buyer/seller to transact at a future date and predetermined price 
• Lot size is crucial it defines the quantity per contract 
• Stock futures allow leverage and shorting, opening the door to profit from both rising and falling markets 
• Index futures offer sector-wide exposure and are ideal for hedging against systemic risk 
• While futures offer reward, they are not without significant risk, especially if your market view doesn’t play out