The financial markets offer various tools to grow your wealth, including stocks, bonds, mutual funds, and derivatives. Derivatives trading has attracted substantial investor interest lately, with futures contracts gaining popularity among investors. According to NSE data, derivatives' turnover has increased 23-fold over the last five years, reaching ?79,927 trillion by March 2024. This is an indication that more investors are interested in futures trading. 

So, what is futures trading, and how can you use it to make the most of market opportunities and manage risk? Let’s find out.

What is Futures Trading?

Futures are derivative contracts. Derivative means they derive their value from an underlying asset such as stocks, bonds, commodities, etc. Trading in futures involves entering into contracts to buy or sell an asset at a predetermined price on a specified future date. These contracts are traded on stock exchanges. 

Futures contracts are standardised, specifying details such as the quantity, quality, and delivery date of the asset.

How to Tap Market Opportunities with Futures Trading

Market opportunities refer to situations in which you can potentially profit from market movements or conditions. Futures trading helps you take advantage of such situations. 

For example, if you expect Reliance Industries' stock price to rise, you can enter a futures contract to buy the stock at today's price. If the price increases, you can sell the contract at a profit.

If you think Tata Motors' stock will fall due to upcoming challenges, you can sell Tata Motors futures. This means you agree to sell the stock at today's price, even if the price drops in the future. If the stock price falls, you profit from the difference by executing the contract at the agreed price.

With futures trading, you can potentially profit from both rising and falling prices by using strategic approaches.

Also Read - The Complete Guide to Index Futures

Best Strategies for Futures Trading

Here are some simple strategies that you can adopt while starting off in futures trading:

1. Hedging: Hedging is like buying insurance for your investments. If you own several stocks and worry their prices might fall, you can sell futures contracts related to those stocks. If the market drops, losses in your stock portfolio can be offset by potential gains in the futures contracts, reducing the overall impact.

2. Spread Trading: This strategy focuses on benefiting from price differences between two related futures contracts. For example, you might buy a contract expiring in one month and sell a similar contract expiring in another month, profiting from the price difference over time.

3. Arbitrage: Arbitrage lets you make risk-free profits by using price differences between the cash and futures markets. In this, you buy a stock in the cash market and sell the same amount in the futures market. By the expiry day, the prices could match, and the difference, known as the futures premium, is your profit. Here, you must ensure that you buy the same lot size or quantity of underlying assets in both markets. 

Conclusion

Successful futures trading requires continuous learning and a well-informed approach. You must adopt thought-out strategies to tap onto market opportunities in a calculated manner. If you wish to expand your knowledge on futures trading, you can explore a wide range of resources available on Sharekhan Knowledge Center.