How do people trade futures?

There are different kinds of stocks and derivatives available for trade and investment these days. Many people have started entering the trade market and approaching brokerage houses to invest in stocks and products with high returns. They want to profit from their regular income and learn how to save for the future. The habit of investment is healthy and fruitful as it helps during an emergency and pays off debts.

People involved in futures trade sign a futures contract by placing bids and offers. The agreement will state the price that the trader will have to at a future date after the delivery of the product. The buyer and seller set a predetermined price and date of delivery at the time of signing the contract. Buyers can also secure the price even when it rises while the delivery date is near to reduce the risk of paying higher amounts.

In every contract, they specify the terms regarding the quantity, quality, price, date, and method used for delivering the products. The cost of the futures contract remains the same, even at the time of delivery. The profit and loss of contract holders depend on the market movement. Suppose there is a rise in the price of a commodity in the contract, the buyer profits. On the other hand, sellers gain when there is a fall in it. Whenever there is a modification in the price, the buyers and sellers accounts get credited and debited accordingly. These changes occur daily, unlike ordinary stocks, where transactions happen when people trade them.

Those who understand what is a futures contract can use it to determine prices of products upon supply and demand. The prices depend on a continuous spread of information across the world and several other factors which include weather, war, debt, etc. They affect the supply and demand, hence impacting its price as well. People reduce their risk when they are purchasing contracts in the market. Since the prices are predecided, all participants know how much to buy or sell from the beginning.

Many people trade in futures and options as well. Sometimes, stock exchanges impose an F&O ban where traders cannot open new positions in stocks mentioned under it. But they have the option of reducing their position by squaring it against the stock. The stock exchange decides to implement the ban when the aggregate open interest crosses 95 per cent of the market-wide position limit.

If a trader has violated the ban and increased or created a new position in the stock, they will have to pay a penalty of 1 per cent of the value of the raised position. The ban remains in force till the aggregate open interest reaches 80 per cent or below of market-wide position limit across exchanges. They can resume trading on the scrip after that. Those who do not understand what is F&O ban face huge losses and square off their transactions at an unfavourable price. NSE displays alerts every 10 minutes for avoiding penalties.

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