What is a Futures Contract? A Simple Guide for Indian Traders
A futures contract is a deal to buy or sell an asset at a fixed price on a future date. Both the buyer and the seller must honour the deal at expiry. Its profit and loss move one-for-one with the underlying price, so it behaves much like the stock or index itself.
A futures contract is one of the two main derivatives in India. It is a simple agreement: lock a price today, settle on a future date.
Futures move in a straight line with the underlying, which makes them easy to understand. The sections below explain it step by step, without the jargon. You can trade index and stock futures on Stockk.
Key Takeaways
- A futures contract fixes a price now for settlement on a future date.
- Both buyer and seller are obligated to honour the deal at expiry.
- Profit and loss move one-for-one with the underlying price.
- Futures use margin, so they offer leverage.
- Daily mark-to-market settles gains and losses each day.
How does a futures contract work?
Consider a case where Tata Motors futures trade at ₹950, with a lot size of 1,425 shares. Trader A is bullish and goes long one lot; Trader B is bearish and goes short one lot. If the price rises to ₹980, Trader A gains ₹30 × 1,425 = ₹42,750 and Trader B loses the same. If it falls to ₹920, the outcome is exactly reversed. The payoff is linear, which is why the chart is a straight line through ₹950.
You do not pay the full contract value to trade futures. You pay a margin, which is a fraction of the value. This is what gives futures their leverage.
How are futures different from buying the stock?
| Feature | Buying the stock | Futures contract |
|---|---|---|
| Money needed | Full value | Only margin |
| Holding time | Unlimited | Until expiry |
| Daily settlement | No | Yes (mark-to-market) |
| Ownership | You own shares | You hold a contract |
Who uses futures and why?
- Hedgers: lock in a price to protect a portfolio or position
- Speculators: use leverage to bet on price direction with less capital
- Arbitrageurs: profit from price gaps between futures and the cash market
What is mark-to-market?
Each day, the exchange settles your gain or loss against the closing price. Profits are added to your account and losses are deducted, every single day. This is called mark-to-market, and it stops losses from building up unnoticed until expiry. It also means you must keep enough money in your account to cover daily losses, or you may face a margin call.
Long vs short futures: a worked example
Imagine two traders looking at Tata Motors futures at ₹950, with a lot size of 1,425 shares. Trader A is bullish and goes long one lot. Trader B is bearish and goes short one lot.
- If Tata Motors rises to ₹980: Trader A gains ₹30 × 1,425 = ₹42,750; Trader B loses the same
- If Tata Motors falls to ₹920: Trader B gains ₹30 × 1,425 = ₹42,750; Trader A loses the same
The gain of one is exactly the loss of the other. Futures are a zero-sum game, and the linear payoff means there is no cap on either side. This is why position sizing and stop-losses matter so much.
A key warning on stock futures
In India, many stock futures settle through physical delivery of shares at expiry. If you hold such a position to expiry, you may need full funds to take delivery or the actual shares to deliver. Most traders avoid this by squaring off or rolling over before expiry.
You will find futures and options and the full options suite on Stockk. Open your free demat account to get started.
Futures and Options are leveraged products and carry a high risk of loss that can be more than the money you put in. This article is only for learning and is not a recommendation to trade in derivatives.
Frequently Asked Questions
What does it mean that futures are linear?
For every rupee the underlying moves, the futures position gains or loses a matching amount in both directions. There is no cap on profit or loss, unlike options whose payoffs bend.
Do I have to hold a futures contract until expiry?
No. You can square off any time before expiry by taking an opposite trade. Most traders exit well before expiry or roll over to the next month.
What is mark-to-market in futures?
It is the daily settlement of gains and losses against the closing price. Profits are credited and losses debited each day, so your account always reflects the real value.
What happens if I hold stock futures to expiry?
Many stock futures settle by physical delivery of shares, which needs full funds or stock. To avoid this, square off or roll over before expiry.
How much margin do futures need?
Margin is a fraction of the full contract value, set by the exchange, and it is what creates leverage.
Investments in securities market are subject to market risks. This article is for educational purposes only and does not constitute investment advice.
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