Most of the beginner investors who are at the early stage of investing are not aware of trading. The only thing they know is that to buy the shares of a company then when the prices go up, sell the shares to make some good profits. But, to start trading futures contract is rather different than your normal stock investing. Being an investor is not enough to trade in the futures contract. You need to be aware of every aspect of futures trading. Stock futures’ trading is different from traditional stocks since it takes place in the future.
But, don’t worry! In this article, I’m going to explain – as an investor, how you can start trading in stock futures? So, I would recommend you to take a good look at the given steps on ‘how to get started?’ – I promise when you finished reading this, you will have all your queries related to stock futures resolved.
So, let’s get started!
Step 1: What Are Stock Futures?
In simple terms, a stock futures contract is an agreement to buy or sell a stock at a future date at an agreed price. These agreements are standardized that trade on an exchange. In a stock futures contract, one party agrees to buy a given quantity of securities and another party agrees to provide (or sell) it.
Hedgers and real companies are mostly the participants in the futures market. It is to manage the exposure to the risk of price changes in stock (or security).
I’m sure most the investors get the meaning behind the definition of stock futures but failed to visualize it. Is that right? – Well, if that’s the case then don’t worry! – In your defense, I couldn’t get it in the first time either!
Therefore, I’m going to tell you – how do futures work in the stock market?
How Do Stock Futures Work?
As we mentioned earlier, a stock futures contract is an agreement between buyer and seller of stock – will be purchased or sold for a specific price, on a specific day in the future. To better understand this, let’s illustrate an example:
Let’s assume someone is saying to buy the 100 stocks of an XYZ Company from the seller at the price he/she pays for the futures contract, comes with the June expiry. On the other hand, the seller is agreed to sell the 100 stocks at the agreed-upon price. Now the buyer who comes into this contract believes that the price of XYZ’s stocks will rise by the start of June however the seller believes that the prices will soar.
Here both parties are expecting to make money in the trading futures contract, with no intention of taking physical delivery of underlying stock whatsoever. Rather, these investors, traders, and speculators make money based on the fluctuations in the price of the underlying stock.
Step 2: Open A Demat Account
Now that you’re aware of stock futures, to trade futures contract you need to open a trading account (DEMAT account) with a stockbroker or a brokerage firm that allows trading futures in Indian stock market. Make sure you pick the right brokerage firm that offers the services that support the market you trade at optimal cost.
Remember, every broker provides varying services from research and advice to quotes and charts. It’s up to you what kind of services you needed to trade in stock futures.
Is the commission too high?
Or the services are not ideal for you and the market you want to trade in?
Once you figured this thing out, you can move on to the next step and register yourself as a client with the broker. Remember, you must have an Aadhaar or PAN card since BSE issued a circular regarding linking DEMAT accounts with Aadhaar card. Apart from this, you gonna need additional documents such as
- Canceled cheque
- Latest photograph
- Driver’s license
- Telephone bill
- Electricity bill
- Bank statements
- IT Returns
- Voter ID
- Bank Attestation.
I forgot to tell you one thing i.e. compare the brokerage charges.
Next, fulfill your KYC (Know Your Clients) form and submit along with your ID proofs and address proofs for verification. After successful verification, you will get an acknowledgment from your broker about the successful account opening.
Last, thing you would need to do before trading stock futures is to add the initial margin money to trade. You can transfer the money from your bank account to demat account and demat account to bank account when your broker successfully links your Aadhaar with your demat account.
Step 3: Select Stocks to Trade
Before you start trading, I would suggest you know how can pick the right stocks to trade stock futures in the stock market. Trading stock futures is different from investing in stocks in a traditional way. You would be required to perform the fundamental and technical analysis of a stock to choose the right stock.
You also must know the ways of news-based stock picking and other stock market tips that can help you to trade the right stocks and make decent gains.
But, remember just knowing what to do, won’t change the fact that you will really need to do this, unless if you wanna lose most of your hard earned money in trading stock futures.
Nevertheless, if you have any query or would like to add something then doesn’t forget to mention in the comment section below.