Quick Answer: What Is a Futures Contract and How Does Futures Trading Work in India?
A futures contract is a standardised, exchange-traded agreement to buy or sell an asset at a fixed price on a set future date. You pay only a fraction of the contract value as margin, and gains and losses are settled in cash every day. These terms cover most of what you need to know:
- Futures contract
- A standardised agreement to buy or sell an index or stock at a fixed price on a set date, where both the buyer and the seller must honour it. In India you can trade index futures such as Nifty and Bank Nifty, and stock futures, on the NSE and BSE.
- Lot size and contract value
- Lot size is the fixed number of units in one contract, set by the exchange, and contract value is the futures price multiplied by the lot size.
- Margin and leverage
- Margin is a deposit, a fraction of the contract value, that lets you control a much larger position. Leverage magnifies gains and losses equally, and losses can exceed the margin.
- Mark-to-market (MTM)
- Profit and loss are settled in cash every trading day against the settlement price, so a shortfall in your balance can trigger a margin call.
- Basis and cost of carry
- Futures usually trade above spot by the cost of carry, which is interest less expected dividends. The gap, called the basis, shrinks daily and reaches zero at expiry.
- Open interest with price
- Rising price with rising OI is a long build-up and falling price with rising OI is a short build-up, while the other two combinations point to short covering and long unwinding.
- Rollover and expiry
- Rollover means closing the near-month contract and opening the next month to stay in the trade. Index futures are cash-settled, and stock futures are settled by physical delivery if held to expiry.
What you will learn
- What a futures contract is and how it differs from buying shares or options
- How margin, leverage and mark-to-market affect your account every day
- Why the futures price differs from spot, and how the basis converges at expiry
- How to read price and open interest together, and how rollover works
- How to plan a first trade with position sizing, a stop-loss and costs in mind
What Is a Futures Contract?
A futures contract is a standardised agreement, traded on an exchange, to buy or sell an underlying asset at a fixed price on a set future date. In India you can trade index futures such as Nifty and Bank Nifty, and stock futures, on the NSE and BSE.
Unlike buying shares, you do not own anything when you buy a future. You hold a contract whose value tracks the underlying. Both the buyer (long) and the seller (short) have an obligation to honour the contract, which is the key difference from an option buyer, who has a right but no obligation.
Index futures are cash-settled at expiry. Stock futures are settled by physical delivery of shares if held to expiry. Lot sizes, margins, expiry dates and charges are set or revised by the exchange and your broker from time to time, so check current details before trading. Numbers in this guide are illustrative.
What Are the Key Futures Terms?
| Term | Meaning |
|---|---|
| Underlying | The index or stock the future is based on |
| Lot size | The fixed number of units in one contract, set by the exchange |
| Contract value | Futures price × lot size |
| Expiry | The date the contract ends; contracts run in near, next and far-month series |
| Margin | The deposit required to open and hold a position |
| Mark-to-market (MTM) | Daily cash settlement of profit and loss |
| Basis | Futures price minus spot price |
| Open interest (OI) | Number of contracts still open, not yet squared off |
How Do Margin and Leverage Work?
You do not pay the full contract value. You pay margin, which is made up of an exchange risk-based portion (SPAN margin) and an additional exposure margin. Suppose, for easy maths, Nifty futures trade at 24,000 with a lot size of 50 and margin of about 12%:
Margin (assumed 12%) ≈ ₹144,000
Profit or loss for a 100-point move = 100 × 50 = ₹5,000
A 100-point move is only about 0.4% of the index, yet it changes your account by 3.5% of the margin you deposited. That is leverage: it magnifies gains and losses equally. Because you hold a contract worth ₹1,200,000 against ₹144,000 of margin, a move of around 12% against you would consume the whole margin. Losses can even exceed the margin, so position sizing and stops matter more than in cash trading.
What Is Mark-to-Market (MTM)?
Futures are settled in cash daily. At the end of each day the exchange fixes a settlement price, your gain or loss versus the previous settlement is credited or debited, and the position carries on at the new price. Example: you buy one lot at 24,000 and hold for three days.
Visualising It: Daily MTM on One Lot
Each bar is the day's cash credit or debit. The running total at the bottom always equals (latest settle − entry) × 50. Illustrative numbers, not live data.
| Day | Settlement price | Calculation | MTM | Running total |
|---|---|---|---|---|
| 1 | 24,100 | (24,100 − 24,000) × 50 | +5,000 | +5,000 |
| 2 | 23,950 | (23,950 − 24,100) × 50 | −7,500 | −2,500 |
| 3 | 24,200 | (24,200 − 23,950) × 50 | +12,500 | +10,000 |
The cash moves every day. If losses eat into your balance so it falls below the margin required, you get a margin call: add funds or your broker may square off the position. That is why a position that later recovers can still be closed out at a loss.
Why Does the Futures Price Differ From Spot?
The futures price usually sits above spot by the cost of carry: interest on the money you would otherwise need to buy the asset, less any dividends expected before expiry. A simple approximation:
With spot at 24,000, an interest rate of 6.5% and 30 days to expiry, that is about 24,000 × 0.065 × 30 ÷ 365 ≈ 128 points above spot. The gap, called the basis, shrinks every day and reaches zero at expiry, when futures and spot must match.
Visualising It: Futures Converge to Spot
With spot held flat for clarity, the futures premium fades day by day and disappears on expiry. Illustrative numbers, not live data.
In real markets both prices move, and the basis widens or narrows with sentiment and dividends. Arbitrageurs buy spot and sell futures when the premium is too rich, and the reverse when it is too cheap, which keeps the two prices close.
What Does a Futures Payoff Look Like?
Futures payoffs are linear: profit or loss changes point for point with the index, in both directions. There is no floor on losses for the long side in practice and no cap on losses for the short side.
Visualising It: Long vs Short Futures
Buy 1 lot at 24,000 and each 100 points is ₹5,000. The short position is the exact mirror image. Lot size 50 assumed.
| Futures | Options (buyer) | |
|---|---|---|
| Obligation | Both sides must honour the contract | Right, not obligation |
| Upfront cost | Margin (refundable, adjusted daily) | Premium (non-refundable) |
| Loss potential | Open-ended, can exceed margin | Limited to premium |
| Time decay | None (basis converges) | Works against the buyer |
| Payoff shape | Straight line | Bent at the strike |
Compare this with the payoff shapes in the Options Trading for Beginners guide.
How Do You Read Price and Open Interest Together?
Open interest counts contracts still open. Reading it alongside price shows whether a move is driven by new positions or by traders closing existing ones:
| Price | Open interest | Common reading |
|---|---|---|
| Rising | Rising | Long build-up: new buyers entering, trend has fresh support |
| Falling | Rising | Short build-up: new sellers entering, weakness has fresh support |
| Rising | Falling | Short covering: sellers closing, rally may lack fresh buying |
| Falling | Falling | Long unwinding: buyers exiting, fall may lack fresh selling |
These are common conventions, not guarantees. Combine them with the volume signals in the Volume Analysis guide and, for options positioning, the option chain guide.
What Is Rollover and When Should You Do It?
To keep a position beyond expiry you roll it over: close the near-month contract and open the same position in the next month. Traders usually roll in the last few days before expiry, when liquidity is shifting to the next series.
Visualising It: Open Interest Shifts to the Next Month
As expiry nears, near-month OI falls and next-month OI rises. The crossover shows when most traders have rolled. Illustrative numbers, not live data.
What rolling costs. The next month trades at a premium (the cost of carry), so a long position rolled from 24,050 to 24,180 pays a roll spread of 130 points, about ₹6,500 per lot, plus brokerage and taxes on both legs. The rollover percentage, the share of OI moved to the next series, is watched as a sentiment gauge, but read it with price and OI trend. For stock futures, avoid holding into expiry unless you are prepared for physical delivery.
What Are the Costs and Tax Basics?
- Trading costs. Brokerage, securities transaction tax (STT), exchange charges, GST, SEBI fees and stamp duty apply. Rates are revised periodically, so check your broker's current charge sheet.
- Margin funding. Margin is tied-up capital that could earn elsewhere, and a shortfall can cause a forced square-off.
- Tax. Futures profits and losses are generally treated as non-speculative business income in India, with specific reporting and audit rules that depend on turnover. Confirm the current treatment with a chartered accountant.
How Do You Plan a First Futures Trade?
- Choose a liquid contract. Prefer near-month index or large-cap stock futures with high volume and OI.
- Check lot size and margin. Use your broker's margin calculator and confirm the full contract value.
- Size the position. Decide the maximum loss you accept, then work back to lots from the distance to your stop.
- Set the stop and target before entry. Because losses are open-ended, exit at a price you chose in advance.
- Use limit orders. They control your entry price and cut slippage.
- Watch MTM and expiry. Keep spare margin for daily debits, and square off or roll before expiry.
Common Futures Beginner Mistakes
Over-leveraging
Taking too many lots for the capital turns a normal swing into a forced exit.
Trading without a stop-loss
Losses are open-ended. A stop is your only cap.
Ignoring daily MTM
Cash leaves your account each losing day. Keep buffer margin beyond the minimum.
Holding stock futures into expiry
Physical delivery brings obligations and higher margin. Square off or roll early.
Forgetting the roll cost
Rolling costs the spread plus charges on both legs. Count it in your plan.
Trading illiquid contracts
Far-month and thin stock futures have wide spreads. Stay with liquid series.
Your Futures Trade Checklist
Run this five-point check before every futures trade:
Contract and liquidity
Is it a liquid contract, and do you know the lot size and full contract value?
Margin buffer
Do you hold extra funds beyond the minimum for daily MTM and volatility?
Stop and size
Is the maximum loss in rupees a small share of your capital, with the stop placed?
Price and OI agree
Does the price and open interest picture support your view?
Expiry plan
Do you know whether you will square off, roll, or face delivery?
Learn the Stock Market with Deepak Kevadia: Boisar, Dahanu, Palghar & Online
This guide is part of the free learning library from Chart Code, founded and mentored by Deepak Kevadia (BSE NISM Certified). Understanding margin, MTM and rollover is step one; sizing positions and managing risk on live charts with a mentor is step two. Chart Code's trading course is taught in person at Boisar and live online, so students from Boisar, Dahanu and Palghar, and anywhere in India, can join.
- In person: 208, Yash Padma Arcade, Boisar Tarapur Road, Boisar, Palghar, Maharashtra 401501
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