Who can trade in stock futures and what are the pros and cons – Economic Times

The stocks futures market is not everyone’s cup of tea. Speculators such as position traders, day traders, swing traders and hedgers usually trade in stock futures. Hedgers use futures to hedge price movements of underlying assets. The ultimate goal is to prevent losses from potentially unfavourable price movement rather than to speculate gains.

The biggest advantage of trading in futures is that you can short-sell without having the stock, and you can carry forward your position. Further, futures positions are leveraged positions, which means you can take a Rs 100 position by paying a margin of Rs 25 and daily mark-to-market (MTM) loss, if any. This can enhance the return on capital deployed.

Trading in stock futures is quite different compared with traditional stock trading, because when you purchase stock futures, you never own the stock, though you have to square off the position on the date of expiry. However, you can make money in stock futures even when the market goes down (short-selling) unlike in traditional stock investing, where you make money only when your stock price goes up.

Additionally, stocks that fall under the F&O segment are much more liquid compared with usual cash market stocks. So you can have easy entry and exit points on these counters. From brokerage or costing point of view as well, trading in futures has less charges compared with cash trades. As buying a future contract can be carried over with no additional cost, or you can say brokerage will not rise for carrying the position, you only need to pay the MTM, if any.

Trading in futures has its own set of risks, and traders with low-risk appetite should strictly avoid the F&O segment, as market volatility with higher contract sizes can erode large capital even in one wrong trade, as one can have no control over future events. Another disadvantage of trading in futures is that one cannot partially close a position and need to square off compulsory on the date of expiry.

The sole purpose of futures trading is to benefit from price movement on either sides. High leverage can enable you to take large positions, but if the market does not go in your favour, the losses could be huge. F&O is all about betting on future price movements and to bet on high risk-high reward. Traders with high risk appetite may trade in the F&O segment with strict discipline and after doing the necessary homework on the market as well as price movement of the securities targeted.

Chairman and MD, SMC Investments and Advisors