Nifty 50 futures are derivative contracts that allow investors to buy or sell the Nifty 50 index at a predetermined price and date in the future. The Nifty 50 index is a benchmark index that represents the performance of the top 50 companies listed on the National Stock Exchange (NSE) of India. The Nifty 50 index covers 13 sectors of the Indian economy and accounts for about 65% of the total market capitalization.
Nifty 50 futures are one of the most popular and liquid derivative instruments in the Indian stock market. They offer various benefits to traders and investors, such as:
- Hedging: Nifty 50 futures can be used to hedge against the risk of adverse price movements in the underlying index or portfolio. For example, if an investor holds a portfolio of stocks that are similar to the Nifty 50 index, he can sell Nifty 50 futures to protect his portfolio from a possible decline in the index value.
- Speculation: Nifty 50 futures can be used to speculate on the future direction of the Nifty 50 index. For example, if a trader expects the index to rise in the near term, he can buy Nifty 50 futures to profit from the expected increase in the index value.
- Arbitrage: Nifty 50 futures can be used to exploit price differences between the spot market and the futures market. For example, if a trader observes that the Nifty 50 futures are trading at a discount to the spot index, he can buy Nifty 50 futures and sell the spot index to earn a risk-free profit.
How to Trade Nifty 50 Futures
To trade Nifty 50 futures, one needs to have a trading account with a broker who is registered with the NSE. The broker will provide access to the trading platform, where one can view the live quotes, charts, news, and analysis of Nifty 50 futures. The broker will also charge a brokerage fee and other charges for executing the trades.
Read more about Nifty Future: What is it and How to Trade it
The trading process of Nifty 50 futures involves the following steps:
- Selecting a contract: Nifty 50 futures have monthly contracts that expire on the last Thursday of every month. There are also weekly contracts that expire on every Thursday, except for the expiry week of the monthly contract. The contracts have different expiry dates and prices, which are determined by the demand and supply in the market. One can select a contract based on his trading objective, time horizon, and risk appetite.
- Placing an order: To place an order, one needs to specify the contract name, quantity, price, and order type. The order type can be either market order or limit order. A market order is executed at the best available price in the market, while a limit order is executed only at or better than the specified price. One can also place a stop-loss order or a target order to exit the trade at a predetermined price level.
- Margin requirement: To trade Nifty 50 futures, one needs to pay a margin amount to the broker as a security deposit. The margin amount is calculated as a percentage of the contract value and varies depending on the volatility and liquidity of the market. The margin amount is blocked from the trading account and released after the trade is settled. The margin amount also changes daily based on the mark-to-market (MTM) mechanism, which adjusts the margin amount according to the daily closing price of Nifty 50 futures.
- Profit and loss calculation: The profit or loss from trading Nifty 50 futures is calculated by multiplying the difference between the buy price and sell price with the lot size. The lot size of Nifty 50 futures is 75 units, which means that one contract represents 75 units of Nifty 50 index. For example, if a trader buys one contract of Nifty 50 futures at Rs 19,700 and sells it at Rs 19,800, his profit will be (19,800 – 19,700) x 75 = Rs 7,500.
- Settlement: The settlement of Nifty 50 futures takes place on a daily basis and on an expiry basis. The daily settlement involves crediting or debiting the MTM profit or loss from trading Nifty 50 futures to or from the trading account. The expiry settlement involves settling the outstanding contracts at the final settlement price, which is determined by taking the average of closing prices of Nifty 50 index on the expiry day. The settlement amount is credited or debited to or from the trading account on T+1 day, where T is the expiry day.
Nifty 50 futures are derivative instruments that allow investors to trade on the future value of Nifty 50 index. They offer various benefits such as hedging, speculation, and arbitrage. They also involve various aspects such as selecting a contract, placing an order, margin requirement, profit and loss calculation, and settlement. To trade Nifty 50 futures successfully, one needs to have a sound knowledge of the market, a good trading strategy, and a disciplined risk management.