Online futures trading platform in India
Among the many different financial instruments on the stock market, futures occupy a special place. Futures are similar to options in many ways, but they have significant differences. Like any other financial instrument, futures contracts have their own special features, which is why an online trading platform must provide access to specific features and have certain tools for analysis to conclude such a contract.
In this review, we will look at what futures are, what features this financial instrument has and how to choose an online futures trading platform in India.
The essence of futures contracts
A futures contract is a contract to buy or sell an underlying asset at a predetermined time and at an agreed price that is fixed in the contract. A futures is a derivative financial instrument and has an underlying asset. The underlying asset for a futures contract can be anything: a stock, a commodity, a currency pair, an index or a cryptocurrency. Depending on the underlying, futures are traded on exchanges which are split into 3 sections:
- Stock Exchange. Index, equity and bond futures are traded on these exchanges;
- Commodity: futures on oil, precious and nonferrous metals, agricultural products;
- Monetary: contracts on currency, interest rates.
Contracts are divided into two types, depending on the nature of the obligation.
A deliverable futures implies that the contract is based on an asset which must be shipped and paid for at the end of the contract.
The second type of futures used in online trading is settlement futures.
Settlement futures can be concluded for any asset, including indices, interest rates, anything that cannot be shipped or touched. In such a case there is a recalculation of the profit and loss at the end of the contract. The intangible nature of the futures allows you to use them to insure the risks of the stock market.
The futures are set on the basis of the standard terms which are set by the exchange where the futures are traded. All terms and conditions (delivery time, place, method, etc.) are set separately for each underlying asset, which helps you quickly sell the asset at a price close to the market price. The value of the futures may be higher, lower or approximately equal to the current value of the underlying asset. The current value of the asset may also be called the spot or spot price.
If the value of the futures is higher than the underlying asset, it is called a contango, if it is lower - a backwardation, if it is about the same - parity.
Futures contracts are bought and sold on exchanges at a certain value, which may vary. The main purpose of futures contracts is for the trader to earn on the difference - to buy cheaper and sell dearer. The futures contracts stipulate the liability of both parties - the buyer and the seller, while the exchange acts as a guarantor.
When buying a futures contract, the exchange freezes the value of the contract in the accounts of buyer and seller. If there are insufficient funds in the account, the broker controls the deposit of funds by the client. If this is not possible, the transaction will be closed according to the rules of margin call - part of the transaction is closed by the broker at the market price.
In the futures markets it is possible to make transactions with considerably higher leverage than in the stock markets. Futures can be used for hedging or speculating on the price movements of the underlying asset.
In a futures transaction, the buyer does not pay for the asset purchased in full and the seller does not make the asset available.
Instead, the exchange reserves a collateral amount in the seller's and buyer's accounts - the security deposit, which typically ranges from 2% to 30% of the contract value.
The amount of the security is set by the exchange and usually depends on the volatility of the underlying asset. At the time of entering into a futures contract in exchange trading mode, the seller and the buyer act anonymously and have no direct access to each other on the delivery date. Therefore, a performance bond becomes the guarantor of the obligations.
Expiration is an important phase in futures contracts. Expiration is the fulfilment of the contractual arrangements. That is, the expiration is determined by the last date on which settlement occurs.
When the moment of execution comes, several scenarios are possible:
- Each party is left with their money;
- If the price of the commodity goes up, the buyer takes a profit, as he purchased the contract at a low price;
- If the price falls, the buyer loses and the seller gains.
Futures are similar to options in many ways, as both instruments can be for buying and selling the underlying asset (securities, exchange rates, indices, commodities), have a limited duration and are used by participants in order to make money (up- and down-trading) or to hedge their risk in the event of price movements in the market.
However, the distinguishing feature of the futures is that buying and selling is not a right, but an obligation of the parties. The exchange acts as the guarantor of their obligations. So the futures are the obligations of both parties. Options are the obligations of one party and the rights of the other.
Online futures trading platform
Today's online trading market offers a wide range of quality platforms for investing in futures contracts.
To choose a futures trading platform in India, first check the list of available brokers that provide their services online. A reliable broker is a licensed broker, so the first thing to do is to check if the brokerage company has a license to conduct brokerage activities. Next, gather all available information on licensed brokerage companies, using verified sources of information - experience in brokering exchange, feedback from experienced market participants, opinion of experts.
Following this advice and choosing some of the best brokerage companies, compare the investment platforms they provide.
An online platform is a fully digital product, a software for trading in the investment market in the online space. In fact, an online trading software will act as your personal broker. Whereas previously any investment transaction was made by calling a personal broker, now you will make all the necessary transactions yourself on the online platform.
It is therefore important that the trading platform is user-friendly, clear, technically accessible and provides access to all relevant information, enabling you to view futures quotes online and the ability to use tools for analysis and trading.
Technical analysis in futures trading
Futures trading generally uses technical analysis to analyse the market. Therefore, you should choose trading platforms that give you access to the necessary technical analysis indicators. Below we will consider the most commonly used indicators in futures trading.
MACD - short for moving average convergence and divergence of moving averages. This indicator is a visualized ratio of two exponential moving averages. Its purpose is to define the trend direction and strength. Signal line in the indicator window is a simple moving average of the indicator values.
RSI Relative Strength Index is used for determining the strength of the current trend, as well as possible reversal points. The Relative Strength Index compares the absolute value of the asset price growth over a certain period of time with the value of the decline over the same period. The result is visualised as a curve on a chart with a range of values between 0 and 100%.
The ADX (directional movement indicator) works proactively and indicates the strength of the trend (whether it will show an upwards/downtrend or whether it will gradually weaken) before the price begins to move. The ADX can also be used to indicate potential changes in volatility in the market.
How to start futures trading in India?
As mentioned above, to start online futures trading in India, you have to choose a reliable brokerage company and register on their trading platform. After registering, many trading platforms offer to open a demo account - we will go into more detail below about what this is for. Then you will have to activate a real account and make real transactions.
Registration on most trading platforms is as simple as possible and is not particularly different from registration on other websites on the Internet, be it an online shop, an educational website or the like. The official website of the brokerage companies has a "Registration" option, activating which you will see a standard registration form. Fill in the registration form with your username and e-mail address; sometimes you may also need to enter your mobile phone number. Confirm your registration using your email (a registration confirmation link will be sent to your mailbox - just activate it) or your mobile phone (enter a confirmation code from a text message into the registration form, which the system will automatically send to your specified mobile number). You can then log in to the platform and gain access to trading online.
Quality and reliable trading platforms always offer a demo account to get acquainted with the platform, as well as an opportunity for practical training if you are a novice trader. The essence of a demo account is simple: the exact replication of the functionality of a real account, but with the possibility of using fictitious funds to avoid real money losses. That means the system will credit your demo account with some amount of fictitious virtual funds, and you can try trading without the fear of losing the money. This is a very good opportunity to practice trading, and it is free of charge.
In addition to a demo account, advanced trading platforms will give you access to a training section, where you can watch video lessons on investing - study these lessons. Try to apply the information you hear in the video lessons by using a demo account. By doing so, you will be able to understand the ins and outs of the market faster and increase your chances of making successful trades.
All real trades on the platform, i.e. those that can bring you real profit, can only be done using a real account. This account is opened automatically when you register on the platform, and to activate and use it all you need to do is to fund this account with real money.
Modern trading platforms offer different options for funding your account, but most importantly, everything is done online and you do not need to visit a bank branch to deposit money into your account.
To find out exactly which deposit methods a particular platform offers, click on the "deposit" option. The system will automatically redirect you to the payment transactions section, where you will see a list of available payment systems. Choose a trading platform that cooperates with known online payment systems, which guarantee safe payment transactions and fast crediting. In addition to payment systems, almost all platforms allow you to fund your account with a bank card, which is the most popular method among traders.
Withdrawals are made using the same tools as deposits.
The benefits of trading in futures
Trading in futures provides traders with numerous benefits. These include, but are not limited to:
- Access to a large number of trading instruments, which allows for significant diversification of one's asset portfolio;
- The futures market is very popular, as it is liquid and this is another major advantage;
- When trading futures, the trader does not purchase the underlying asset itself, but only a contract for it at a price that is substantially lower than the value of the underlying asset. What we are talking about is the collateral. This is a kind of pledge that is charged by the exchange. Its size ranges from two to ten percent of the value of the underlying asset.
Futures contracts protect traders from the volatility and surprises, which affect the market. Often such contracts are used in large industries to provide a degree of certainty about asset prices in the coming months. At the same time, the contracts themselves can also be bought and sold; this is already a space for speculators. Futures become more or less valuable depending on the changes in the market since the conclusion of the contract and the time remaining until its expiration.
At the same time, it is worth remembering that warranties are not a fixed amount. Their amount may vary even when the contract has already been purchased. It is important to keep track of it, because if there is not enough capital to cover them, the broker may close the positions, if there are not enough funds on the trader's account.
There are inherent risks in investing, so before you invest, do your research, analyse the market situation, and if you have little trading experience, always start with a small investment. Modern trading platforms allow you to start trading with just a few dollars to get started.
You can see for yourself all the advantages of trading futures online, all you have to do is to open a free demo account and test the trading platform and the financial instrument yourself.