Glossary
Futures
A contract to buy or sell an asset at a fixed price on a specific future date.
Simple explanation
On Indian exchanges, stock and index futures settle on the last Thursday of each month.
You only need to deposit a small margin (say 15-20%) to take a futures position.
Futures are used for speculation, hedging, and arbitrage.
On NSE, the two most actively traded futures contracts are Nifty 50 futures and Bank Nifty futures. Nifty futures have a lot size of 25 units, meaning at Nifty 22,000, one lot represents a contract value of ₹5.5 Lakhs. Bank Nifty futures have a lot size of 15 units. Stock futures are available for about 180 individual stocks, with lot sizes varying. Reliance futures might have a lot size of 250, while Infosys could be 300.
Futures contracts on NSE are available for three monthly expiries at any given time: the current month, next month, and the month after. The current month contract has the highest trading volume and tightest bid-ask spreads. As expiry approaches, traders 'roll over' their positions to the next month by closing the current contract and opening a new one. The cost of this rollover (called the 'basis' or 'spread') is a real expense that traders must factor in.
One important concept is 'mark-to-market' (M2M) settlement, which happens daily in Indian futures markets. If you hold a Nifty futures position overnight, your profit or loss for the day is settled in cash every evening. If the market moves against you, money is debited from your account. If your account balance falls below the maintenance margin, you get a margin call from your broker and must add funds immediately or face forced liquidation.
Futures can also be used for hedging. If you hold ₹10 Lakhs of Nifty 50 stocks in your demat account and fear a short-term correction, you can sell 2 lots of Nifty futures as a hedge. If the market falls, your stock portfolio loses value but your short futures position makes money, offsetting the loss. Many institutional investors and HNIs in India use this strategy around events like Union Budget, elections, or RBI policy announcements.
Real-world example
Suresh is bullish on Reliance and buys 1 lot of Reliance futures (lot size 250) at ₹2,500 per share on NSE. The contract value is ₹6.25 Lakhs, but he only deposits ₹1 Lakh as margin on Zerodha. Over the next week, Reliance rises to ₹2,600, a 4% move. His profit is ₹100 × 250 = ₹25,000, which is 25% return on his ₹1 Lakh margin. However, if Reliance had fallen to ₹2,400 instead, he would lose ₹25,000, and daily M2M debits would have reduced his account balance each evening. If his balance fell below the maintenance margin of about ₹75,000, Zerodha would send a margin call. If Suresh did not add funds by the next morning, his position would be auto-squared-off at whatever price the market was trading.
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