So friends today we will discuss about Futures Trading in details so I request you to read the post till the end to understand futures trading.
What is Futures Trading?
Futures trading is called the trading of the rich, because in one day you can earn 15 thousand to 1 lakh rupees but through futures trading, with only 1 lot share contract, and you can buy or sell it. Both buying and selling but you can do futures trading. I am showing in this example what is futures trading?
Here is an example –
If you understand the Share Market, stock market and It’s policy and also what is Sensex then you can easily earn money from share market.
Suppose a farmer cultivates almonds, now there is an oil company that buys the almonds from that farmer and makes almond oil. The oil company buys almonds from that farmer at a fixed price and sells the almond oil made from it in packets at a fixed price in the market.
The oil company, however, cannot raise the price of its almond oil arbitrarily, selling the oil it is selling at Rs 100 or Rs 120 per packet. That is why when oil companies buy nuts from farmers, they have a binding because if they buy nuts at a higher price, they will not be able to raise the price of oil immediately.
Futures trading explained
Suppose they buy nuts at Rs 1,500 per kg instead of Rs 1,000, but the price of oil will automatically go up a lot, to around Rs 150 per packet, what was Rs 100 per packet before will now be Rs 150 per packet. So the oil company will buy the nuts from the farmers at a fixed price. They make an agreement in advance that even if the price of nuts goes up later, but they will take it as Rs. 1000 per kg, this is the futures contract.
So suppose today they are contracting, today is May 17, 2020, they are contracting with the farmer – three months later when they take delivery of the nuts, when they buy the nuts from the farmer, they will buy nuts at Rs. 1000 per kg. Then, after three months, if the price of almonds goes up to Rs 1,500, instead of Rs 1,000 per kg to Rs 1,500 per kg, the oil company will still buy it at Rs 1,000 per kg.
Suppose in July it was Rs. Looking to the future, they are going to buy the nuts at a fixed price, even if the price goes up, they will buy the old price because they have already contracted in May, three months later if the price goes up in June-July-August, but they will buy the nuts at the same price. This is the basic concept of futures trading.
I am showing an example of futures trading on Coal India stocks or Coal India shares. Yesterday, on May 15, when the Coal India share price was closed, the call India closing price on last Friday was 129 rupees 60 paise. What is meant by underlining the futures contract here? Coal India refers to the stock. Here I am contracting futures or buying futures or selling futures on Coal India shares but instead we can also buy futures / futures on gold silver or crude oil.
So the underlying asset here means Coal India Share or Gold Silver. These are called underline assets on which futures are being contacted. This time look at the price of 129 rupees 60 paise in the market but the price of the future differs a little from the main share price. On May 15, the share price was 129 rupees 60 paise which I showed a little earlier but the future price is 129 rupees 40 paise showing on the NSE India website.
So this time when I will do the contract of Future, Future has an expiry date of 26th May 2020, so even if the price goes up, I will buy it at 129 rupees 40 paise. Suppose the price goes up to 180 rupees on May 26, but I will also buy the shares on May 26 at 129 rupees and 40 paise, but I will buy the shares, Coal India shares and some shares – 1 lot of shares. If I buy 1 lot in a futures contract, then how many shares are equal to 1 lot shares in 2800 shares.
But you can’t buy one or two, you have to buy one lot in a group, then you can buy a lot of 2600 shares at 129 rupees 40 paise. Suppose on May 28th the price has gone up to 170 rupees but you can buy it at 129 rupees 40 paise. In a word, the price can go up to 180 rupees.
So what is the spot price, the spot price is 129 rupees 60 paise which is the actual price of the share, the future price but a little different. Here on the NSE India website it shows 129 rupees 40 paise.
After that I think I can buy 2600 shares, why should I go to buy futures? Why should I take the group of 2600 shares, I can buy only 2600 shares and the matter is the same. As the share price rises, so does the price of the futures contract, almost in the same way, we can buy shares without buying futures.
Now I will show you why you should buy futures – if you want to buy the last price of Coal India which was 129 rupees 60 paise, 2700 shares, then the price will be (2600 X 129.60) = 349920 rupees, which means about three and a half lakh rupees. 1 lot means the quantity is fixed before you stay, it is fixed before you stay but you can’t change it.
If you want to buy 2700 shares of Coal India, you have to pay around three and a half lakh rupees. If I take a futures contract this time, I will need Tk 82,000, 23% of the total money means, if I need to buy 2,800 shares, I need 3.5 lakh rupees to buy that amount, but I need Tk 82,000. So there is 3.5 lakh rupees and here 82 thousand rupees, which means that I have to invest 23% of the amount of money I have to invest to buy shares, I am looking to buy a futures contract.
That is why it is an effect of how many shares can be bought for a small amount of money, that is why futures contracts are bought, as it can be done for a small amount of money. With only Rs 82,000 instead of Rs 3.5 lakh, I can buy 2600 shares of the same price with the same amount if I buy a futures contract and my investment is much less. But Future Contact has an expiry date of 26th May 2020.
This lot size of futures or options cannot be changed, it is fixed in advance, which you cannot change. Such as Tata Steel’s lot size 1500, State Bank of India’s lot size 3500 etc. Then you are getting the right of the entire 2600 shares with one fifth of the money. This is an advantage of futures contracts. So what is a futures contract? So when you buy 1 lot of shares of Coal India on the expiry date, if the price goes up to 160 rupees or 180 rupees, you can buy at 129 rupees 40 paise, although maybe then the price has increased to 160 rupees or 180 rupees. But you can buy it at a much lower price.
There is a chance that the price will go up because Minister Nirmala Sitharaman yesterday announced something about mining, coal toll, which can cause the price to go up so you can buy it.
Now the question is will you wait until the expiry date? Will you wait for the price to go up? Suppose the price goes up by Rs 10 on Monday, then what will you do? If it can increase, then you will wait? No, there is nothing wrong with waiting.
Suppose the futures price of Coal India shares goes up to Tk 160 on May 26, there is a cash settlement here, then you can buy Coal India shares at Tk 129 for 40 paise but on May 26, even if the price goes up to Tk 180 or 180.
So this will be the price difference, the share price has actually reached 160 rupees then, but then you can buy 129 rupees 40 paise. This is the price gap, but it will be your profit. Then your profit will be (180 – 129.40) X 2600 = 72,620. It is on May 26 when the price is 180 rupees. Then surely the basic fund of the futures contract was understood.
Now suppose it can be reduced without increasing. Suppose on May 26, the expiration day of the futures contract, the price of Coal India shares fell by 120 rupees, but you still have to buy at 129 rupees 40 paise, although the share price has dropped to 120 rupees. Then you have to buy at a higher price. If the share price goes down, the future price will also go down, but according to the contact, you have to buy at a higher price. But then you will lose, if the share price falls.
Because you bought the future. You would have benefited if you had been sold in the future. If you had sold the futures contract at Rs. 129.40, and on the expiration day on May 26, the price dropped to Rs. 120, then you can buy the contract at a lower price, and you will make a profit. Suppose again that if your share price goes up to 140 rupees tomorrow, then the price of the futures contract will also go up. Suppose 140 rupees is 10 paise like this. Yes (140.10 – 129.40) X 2600 = 2690 rupees, about 29 thousand rupees.
It is understood that there is no need to hold your futures contract till the last expiry date. What is happening here is that you are transferring the futures contract you bought to someone else, while you are selling, someone is buying one. Then he will hold the futures contract. What is his vision? He thinks Coal India’s share price will rise further. Then surely the futures contract is understood.
You can also read : https://surejobonline.com/how-to-earn-money-in-share-market-daily/