Thursday, May 9, 2013

Note For Those Who Are New To Stock Futures Trading

Since my recommendations to make money from stock market will be for very short term, it is advisable that you leverage your profit by entering futures trade of the recommended stock. But those who are uninitiated to stock futures trade, will have lot of mental apprehensions. For newbies I would like to touch upon rudimentary issues regarding stock futures trade. Read on to know the details/nuances of stock futures trade:-
  1. Stock futures is traded almost in the same fashion as you trade that particular stock in the cash segment. Only difference is that when you buy a stock you get delivery of the stock in your Demat Account. But when you buy futures of that stock, you do not get physical delivery of that stock. Instead the buyer only enters into a contract with the seller.
  2. While placing 'Buy' order for stock futures, quantities  need to be filled as fixed by the Exchange for each stock, called Lot Size. So if you have to buy Relinfra futures, you have to buy minimum one lot and the size of the lot is 500 shares. That means you have to buy minimum 500 number of Relinfra futures or buy in multiples of 500.
  3. You can buy any of the three contracts of Relinfra-  May contract or June contract or July contract. Each contract expires on the last Thursday of that particular contract month. Thus May contract will expire on 30 May, June contract will expire on 27 Jun, and July contract will expire on 25 July. After you buy a particular month contract, you have the liberty to sell that contract anytime from that moment till expiry of the contract
  4. Let us see how much money you have to invest to buy one lot of Relinfra Futures, consisting of 500 shares. You will have to pay about  20% of the total value of one lot. If current price of Relinfra June Futures is say 400, then the total cost of one lot of 500 shares will be 400x500 = Rs 2,00,000/-. But while buying one lot of Relinfra June Futures, you will only pay 20% of Rs 2,00,000/- which works out to Rs 40,000/-. In other words you can buy one lot of 500 shares of Relinfra June Futures for Rs 40,000/-, and this is the leverage you are getting to trade in stock futures. Suppose after buying one lot of Relinfra June Futures at 400, you find that the price has shot up to 420. and you sell it. Since you have sold one lot of Relinfra June futures at 420, you will make a profit of 20x500= Rs 10,000/-.
That is how simple stock futures trading is. But initially if you are little hesitant in filling the 'Buy' order form, you may seek the help of relationship manager of your broking firm. The advantage of stock futures trading is not only in the leverage that you get in terms of capital requirement, but also in the following areas:-
  • You can quickly get into market and as quickly get out and yet make substantial return on investment. This means that for any position you take in the market, you can plan to have a very short exposure so as to cut down on risk of long exposure in uncertain times.
  • Even when the market is falling because of a downturn or Bear Run, you can make money in stock futures. This is possible because you can take a sell position even before you buy. So this means that you can first sell one lot of Relinfra June Futures and later when the prices drop sufficiently, you can buy back one lot of Relinfra June Futures. Suppose you 'SELL' one lot Relinfra June Futures today at 400, and after couple of trading sessions you find that Relinfra June Futures is trading at 380. You can buy back your sell position at 380 and thereby make a profit of 20x500= Rs 10,000/-. Thus you can actually make profit in Bear market through trading Stock Futures. You do not have to keep waiting for start of a Bull market to make profit.
There is always a catch in all rosy pictures and the catch here is MtoM (Mark to Market). After you take a position (either buy or sell any stock futures), you need to keep your trading account sufficiently funded for MtoM. Supposing you Sold one lot Relinfra June Futures for 400 today and at the end of trading session Relinfra June Futures closes at 410. That means at end of the day you have incurred a notional loss of 10x500= Rs 5000/-. This Rs 5000/- is the MtoM requirement for today for the Sell position you have taken in Relinfra June Futures. And this much amount should be there in your trading account for you to keep holding this Sell position in your account. You may contact your broker to get more details on MtoM.

 We have seen that trading stock futures is simple enough. So get ready to enter into 'Sell' positions in May series to make profit. I will be giving you 'Sell' recommendations very shortly.