Nifty Future is a type of derivative contract that allows 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 Future is one of the most popular and liquid derivative instruments in the Indian stock market. It offers various benefits to traders and investors, such as:
- Hedging: Nifty Future 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 Future to protect his portfolio from a possible decline in the index value.
- Speculation: Nifty Future 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 Future to profit from the expected increase in the index value.
- Arbitrage: Nifty Future can be used to exploit price differences between the spot market and the futures market. For example, if a trader observes that the Nifty Future is trading at a discount to the spot index, he can buy Nifty Future and sell the spot index to earn a risk-free profit.
How to Trade Nifty Future
To trade Nifty Future, 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 Future. The broker will also charge a brokerage fee and other charges for executing the trades.
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The trading process of Nifty Future involves the following steps:
- Selecting a contract: Nifty Future has 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 Future, 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 Future.
- Profit and loss calculation: The profit or loss from trading Nifty Future is calculated by multiplying the difference between the buy price and sell price with the lot size. The lot size of Nifty Future is 50 units, which means that one contract represents 50 units of Nifty 50 Index. For example, if a trader buys one contract of Nifty Future at Rs 19,700 and sells it at Rs 19,800, his profit will be (19,800 – 19,700) x 50 = Rs 5,000.
- Settlement: The settlement of Nifty Future 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 Future 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 Future is a derivative instrument that allows investors to trade on the future value of Nifty 50 Index. It offers various benefits such as hedging, speculation, and arbitrage. It also involves various aspects such as selecting a contract, placing an order, margin requirement, profit and loss calculation, and settlement. To trade Nifty Future successfully, one needs to have a sound knowledge of the market, a good trading strategy, and a disciplined risk management.