What are the Differences Between Margin and Futures Trading in India?
One of the most popular dilemmas in the world of trading - what is the difference between Margin Trading and Futures Trading? Are they literally one and the same?
This is the question that stumps many an amateur trader when they begin their trading journey.
Futures Trading and Margins trading are two fundamentally different concepts, providing different benefits altogether.
While Futures Trading allows you to sell contracts that allow you to buy/sell an underlying asset at a specific time and price, margin trading allows you to trade using leverage. You'll be required to set aside money as collateral (as margin), to use the levered funds for trading. if you end up losing money on the trades, you'll be required to post up more collateral.
Margin trading can be done both in the spot and in the derivatives market. This means, you can effectively utilize margins to trade in futures contracts as well.
With that out of the way, let's go more in depth about what Futures trading and margins trading really means, and how you can use that to your advantage.
What is Margin Trading in India?
Margin Trading allows you to purchase stocks that you can't otherwise afford (or you're comfortable investing in). You are allowed to purchase shares by paying only a marginal amount of the full value of the share. This margin is either paid as cash, or other shares as a collateral, allowing you to purchase these shares.
They are considered as levered positions - your stock broker funds your margin trading transactions. This additional margin is settled later, once the position is squared off. You can profit off this transaction only if the gains from this trade is much higher than the margin.
Key Benefits of Margin Trading
If you're a speculator, with a knack for cashing out on short-term price fluctuations, you can magnify your returns with margin trading.
Shares and securities that you already hold in your Demat account, can be utilized as a collateral for the margin trades.
Margin trading magnifies your RoI (Return on Investment).
Margin Trading allows you to purchase shares that you would otherwise not be able to purchase.
100% regulated by the Securities and Exchange Board of India (SEBI).
How to Do Margin Trading in India?
You are required to open a margin account with your preferred broker to avail this facility. The margin varies from broker to broker. You are required to maintain a minimum balance in your margin account at all time, else you run the risk of your position being squared off prematurely. At the end of each trading session, the square off is mandatory.
One of the best brokers that allow you to open free trading account online with margin facilities is Goodwill Wealth Management - one of the best trading brokers in India. Goodwill allows you to trade across multiple segments, all with a single margin.
What is Futures Trading in India?
Futures contract are a type of derivatives, that represents an agreement to sell/buy a specific quantity of the underlying asset (stocks, commodities, currencies or even cryptocurrencies), at a specified price, on a specific date in the future (hence the name).
These contracts are traded multiple times in the open market, up until the fulfillment date, making futures a popular investment for trading.
These contracts are either settled by physical delivery, or by cash.
Futures trading is particularly common with commodities. If someone purchases a march futures contract for crude palm oil, they're agreeing to purchase a 1000 barrels of crude palm oil at the specified price, upon expiration. The original writer/purchaser trades their contract to other people, and the ultimate holders will honor this contract, either by physical delivery, or settled using cash.
Some futures instruments might be cash settled only, where physical delivery is not common. For instance, all Foreign Exchange trades are currently cash settled in India.
Key Benefits of Futures Trading
Tend to be highly leveraged - for most futures trading, investors have to set apart a margin (usually 10% of the contract value) as collateral. This allows speculators to earn exponentially more with less capital.
Highly Liquid Market - A large number of futures contracts are traded on a daily basis, making It one of the most liquid markets in the world. Market orders can be placed and executed quickly, particularly for futures contracts that are nearing their expiry. Large positions can be exited without any adverse impact on the price of the underlying asset/ the futures contract.
Low costs - Commissions on futures contracts are usually low, with brokerage as low as 0.08% of the contract value. This depends on the broker though, for instance Goodwill charges flat INR 11/trade, or 0.08% whichever is lower. On the other hand, a full-service broker might charge a higher brokerage commission.
Amazing tools for hedging - Companies across the world use futures contracts to hedge against Foreign Exchange risk, price risk or even interest rate risk.
How to Do Futures Trading in India
While you don't necessarily need a Demat account to begin your futures trading journey in India, it is highly recommended that you open one. If you intend to take delivery of the futures contract, you're required to open free Demat account in India. Head on over to your preferred brokerage site, establish a futures trading system, and begin your trading journey now!
If you're looking to open a free Demat and Trading account, head on over to gwcindia.in, or click this link to begin the process.