What is Futures Contract?
- 18th July 2025
- 12:00:00 AM
- 7 min read
Looking to diversify your portfolio while managing risk? Well, a futures contract is one of the top options as it lets you buy or sell assets, like commodities, securities, or indices, at a fixed price on a future date.
Ideal for hedging or speculating, they help protect your investments from price swings. Their growing popularity is clear: the NSE reported a turnover of INR 22,80,284.13 crore from index futures. Want to know how they work, their features, and how to get started? Read on to explore the world of futures trading in depth.
Futures Contracts Explained With an Example
It is a derivative contract that has an obligation for the involved parties to buy or sell assets, commodities, or securities at a predetermined price and date.
This means that if you opt for this contract, you must buy or sell your chosen underlying assets at the predetermined price or date, even if the price moves against your expectations.
For example, suppose you have entered into a future contract with ABC company to buy 100 shares at INR 60 each, next month. If, in the next month, share prices increase to INR 70, you will make a profit of INR 1000. If the price falls to INR 50 per share, you still need to buy the shares at INR 50 each, resulting in a loss of INR 1000.
4 Features of a Futures Contract
After learning what is futures contract, note its following features:
-
Standardisation and Exchange Traded
A futures contract comes with standardised terms, which means they include the quality, quantity and date of delivery of your chosen underlying asset. They are also available and traded in recognised exchanges like the NSE, BSE, MCX, etc., with liquidity options.
-
Transparent Pricing
If you opt for a futures contract, another feature you will observe is its transparent pricing. This means you can see the real-time price details of a particular contract before choosing it, which establishes a fair market practice.
-
Date of Expiry
If you invest in this type of contract, you should know that you are obligated to buy or sell assets before their expiry date. In India, such a contract expires on the last Thursday of every month. For example, if you buy a contract on 14th July 2025, its expiry date would be 31st July 2025.
-
Cash Settlement or Delivery
Depending on your chosen type of contract, the settlement can be in the form of cash, depending on the price differences or physical deliveries of assets.
Attributes of a Futures Contract
After learning the futures contract meaning, let us take a look at the attributes of this contract:
| Regulator | The Securities and Exchange Board of India (SEBI) regulates trading in futures contracts in India. Investors can trade in futures at recognised exchanges such as the NSE, BSE, and MCX. |
| Concept of margin | Such contracts are traded on margins. This means if you do not have enough funds to cover the full cost of an asset, you can pay a smaller amount as a margin instead of paying in full for the asset upfront. This margin usually ranges between 10% and 50% of the asset value. |
| Asset availability | You can opt for a future contract and invest in diverse asset classes, including stocks, commodities, market indices, etc. For example, the SEBI approves futures contracts on 224 securities traded under the capital segment in the NSE. |
| Types of participants | Speculators and hedgers are two types of market participants in this contract. Investors who speculate and bet on the price fluctuations of the assets are speculators. Hedgers are buyers who lock in the price at which they will buy or sell assets on a future date. |
Ready to trade futures with ease? The PL Capital Group – Prabhudas Lilladher offers a seamless platform for futures contract trading along with stocks, mutual funds, IPOs, and more.
How Do You Benefit From a Futures Contract?
Upon understanding what is futures contract, take a look at its advantages:
-
Hedging
These types of contracts are used for hedging to protect investments against price fluctuations. For example, suppose an investor holds 100 shares of a company at INR 100 each. To hedge, he buys a futures contract to sell them after a month at INR 100 each. If the price drops to INR 90 the next month, the investor can sell at INR 100, limiting his losses.
-
Diversification of Portfolios
Another key advantage of this type of contract is that it lets you diversify your portfolio instead of sticking with a single asset type. It lets you gain exposure to a variety of asset classes, such as commodities, market indices, currencies, etc.
-
High Liquidity
Assets, such as market indices, currencies, frequently traded commodities, etc., offer higher liquidity. Therefore, you can enter or exit the market at your convenience and thus lower the risks of being unable to sell or buy contracts.
Which Risks Should You Mind About Future Contracts?
Upon learning the futures contract definition, take note of its risk factors:
-
Requirement of a Well-Planned Strategy
About 48% of traders in India believe that almost 50% of futures and options traders earn good returns, which is an unrealistic expectation. Such a concept also attracts 40% of new or novice traders towards future contracts and options, from which 13% face losses. This happens due to a lack of strategy applied during trading in these types of contracts.
-
Risks of Global Event
Different international events, such as economic crises, political events, social unrest, etc., can affect currency and commodity futures. This might force investors like you to buy or sell assets at a higher or lower price than expected.
-
Risk of Leveraging
Another significant risk in this type of contract is leverage risk. This allows you to control a larger position with a smaller amount of margin investment. For example, with a margin investment of INR 50,000, you can control a position worth INR 5,00,000 when the margin is 10%. If the market moves unfavourably, there is a risk that your loss will be 10 times bigger.
Conclusion
The future contracts allow you to buy or sell an underlying asset such as stocks, commodities, currencies, etc., at a predetermined price and date. This means that if the price of your chosen asset rises before the expiry of the contract, you can buy it at a lower cost or sell it at a higher price.
With PL, you can not only trade in stocks but also diversify your portfolio by investing in mutual funds, derivatives, and more. Download the PL Capital app today!
FAQ’s
1. What does it mean to sell futures contracts?
When you enter into a futures contract to sell an underlying asset, you set a price and a future date, which is its expiry date. You are obligated to sell the asset on that date, realising a profit if the asset price is higher. Also, if the asset price is low, you incur losses too.
2. What are the 4 types of futures contracts?
If you opt for this contract, you have 4 types of contracts to invest in. These include commodity, stock, currency and index futures.
3. What happens when I buy a futures contract?
If you buy a futures contract, you can consider it equivalent to purchasing multiple stocks from the market at once. The only difference is that you do not take delivery of the assets at the moment. You purchase them at a set price on a date. Here, you make a profit if the asset price is higher at the set date, and you can still buy assets at a lower price.
PL Blog
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
