Futures contract in detailed terms means to buy or sell a traded security in the open market at a predetermined amount for a specified time frame in future. In layman terms, we can say it is a long term contract. The normal trading is done after payment of money. Once money is transferred shares are bought or sold based on the order specifications. The same thing happens but with two modifications. The time frame for the future contact is fixed beforehand and only a margin needs to be paid upfront. At the end of the time cycle the increase or decrease in share valuation is gained or paid simultaneously and margin is available back. In case of losses, it is paid from margin automatically.
For instance let’s take a scenario of buying RELIANCE in the current market situation. The margin needs to be paid for the same and it is available for one month and two month time frame. If the buying is done at 2200 Rs for July Futures. If at the time period of July expiry the share price was at 2250 Rs. This shows that the net gain is made for 50 Rs. Thus the number of shares multiplied by 50 Rs is the annual gain.
Lets know more about the stocks of Indian markets and futures contracts related to them.
The trades in future are made in lots. This means that the shares are not traded in 10 or 20 or irregular quantities. Rather the size of every lot is fixed beforehand. Thus in future contracts the buying and selling is done in lots.
If you purchase one lot of Reliance then it means you have to buy 250 shares of Reliance in one go. This amounts to a lot price of 2200 Rs.* 250 Rs. = 550000 Rs. For one lot the amount is 550000 Rs. Now one has to only pay a margin for buying it. The lot sizes are not fixed for every share. The lot size for every share is different. For example, the lot size of Adani Ports is 1250 shares. The lot sizes are decided by SEBI.
SEBI has set an independent rule for lot size. The lots are based on the price range of every stock. Between the price of 25 Rs to 50 Rs the lot size would be in multiples of 8000. The price range of 51 Rs to 100 Rs is allotted the size in multiples of 4000 units. For the price range of 101 Rs to 200 Rs the lot size is 2000 units and multiples of it and for the price range of 201 to 400 Rs the lot size is 1000 units and multiples of it. From 401 Rs to 800 Rs the lot size is 500 shares and its multiples. Similarly for the price range of above 800 Rs but below 1600 Rs is set in multiples of 250 shares. Above the price of 1600 Rs the shares would be having a lot size of 125 shares.
Buying, Selling and Expiry
With the above explanation it is very clear that shares can be bought and sold in fixed quantities. Similarly indices also have lot size and are bought and sold in the same manner. However one can sell the loss any time he or she wants to. For instance if a person has bought one lot of Shree Cements on 18th June and the future expires at June end, he or she can sell the same on intraday basis or on the last trading day for the futures i.e. 24th June.
Now one would assume how is the last trading day for futures decided ? It is very simple: the last Thursday of every month is regarded as Future Expiry. Heaven anything bought with the June Futures would end on 24th June, 2021 (last Thursday of June month). So the buying and selling can be done at any time as per the discretion of the shareholder.
The margin levels are a percentage of the entire lot amount which needs to be paid upfront for taking positions in the future contracts. This percentage is not fixed and changes on the basis of the risk appetite of brokers and SEBI’s norms. For example, let’s consider Adani Ports. The current margin level to be paid for one lot of Adani ports is 36% of the entire lot size.
Price of Adani Ports – 713 Rs.
Lot Size – 1250 Shares
Margin available – 36%
Hence 713 Rs*1250 = 891250 Rs. This is the entire valuation of the lot picked for Adani Ports. Here the margins are also known. So 36% of 891250 Rs is 320850 Rs. With this if a person needs to take one lot of Adani ports Futures then he or she needs to pay 320850 Rs upfront. After this the allotment would be done into the DEMAT account of the person. The best part about the expiries is that the entire amount is not wanted for payment and the difference amount is deducted / added from margins / to margins at the end of future contracts.