What is a Futures Contract in India?

A futures contract in India is a legal agreement to buy or sell a specific asset at a fixed price on a fixed future date. The asset can be a stock, an index, a commodity, or a currency, and the contract is standardised and traded on exchanges like NSE, BSE, and MCX.

Futures are not new investments. They are price-locking tools. A farmer locks the sale price of wheat before harvest. A fund manager locks the buy price of Nifty before a budget. The same logic powers every contract on the screen.

What a futures contract really contains

Each contract specifies four things: the underlying asset, the lot size, the expiry date, and the tick size. Once two parties agree on the price, every other detail is fixed by the exchange.

NSE F&O futures expire on the last Thursday of every month. MCX commodity futures have their own monthly cycle, with crude oil and natural gas being the most active. Index futures (Nifty, Bank Nifty) also have weekly versions on some segments.

The four parts of a futures specification

• Underlying: the stock, index, or commodity the contract tracks
• Lot size: the minimum quantity per contract, fixed by the exchange
• Expiry: the date the contract settles
• Tick size: the smallest price movement allowed

How a futures trade works step by step

You do not pay the full value of a futures contract. You post a margin, usually 10 to 20 percent of the contract value, and the exchange holds it as collateral. Profit or loss is settled daily through a process called mark-to-market.

If you buy a Reliance futures contract at 2,800 and the price closes at 2,820, the exchange credits the gain (20 rupees per share, times the lot size) to your account that night. If it closes at 2,780, you pay 20 per share. This continues every trading day until you exit or expiry arrives.

Example: a real Nifty futures trade

You buy 1 lot of Nifty futures at 22,000 with a lot size of 25. Total contract value: 5,50,000 rupees. Margin required: about 70,000 rupees. Two weeks later, Nifty rises to 22,400. You exit. Your gross profit is 400 points x 25 = 10,000 rupees on a 70,000 outlay. That is a 14% return in two weeks, but the same move in the other direction would have wiped out the same amount.

Cash settlement vs physical settlement

Most index futures in India are cash-settled. The difference between your entry price and the final settlement price is paid or received in cash. No actual basket of stocks changes hands.

Single-stock futures are physically settled. If you hold a Reliance futures contract until expiry, you must give or take delivery of the underlying shares. This is why most active traders close their positions before expiry day.

Who actually uses futures, and why

Three types of traders dominate the segment:

• Hedgers protect existing positions. A mutual fund holding 500 crores of stocks might short Nifty futures before a big policy event.
• Speculators take directional bets. They use leverage to magnify short-term moves.
• Arbitrageurs exploit small price gaps between cash and futures markets, locking in tiny but near-riskless profits.

For a retail investor, futures are useful only after you understand margin, mark-to-market, and the cost of carry. Without that, the leverage that helps you on the way up will hurt you twice as fast on the way down.

Risks you must respect

Leverage cuts both ways. A 10% drop in the underlying can wipe out 60 to 80% of your margin. The exchange will issue a margin call, and if you do not top up, your position is closed at a loss.

Roll-over costs eat into long-term holders. If you keep extending a futures position month after month, the spread between current and next-month futures shows up as a cost. This is why futures are not a substitute for buying shares.

SEBI tightened position limits and disclosure norms in 2024. You can read the latest framework on the official site at sebi.gov.in.

Common mistakes new futures traders make

The same handful of errors trip up almost every beginner. Knowing them in advance is half the battle.

• Treating margin as the maximum loss — your loss can exceed margin if you do not exit
• Holding a losing position into expiry hoping for a reversal
• Ignoring the cost of carry on rolled-over positions
• Trading low-liquidity stock futures with wide bid-ask spreads
• Confusing nominal value with risk exposure

The futures market does not punish ambition, but it does punish denial. A clear stop-loss and a written exit rule before entry are worth more than any pattern on a chart.

Frequently asked questions

What is the minimum money needed to trade futures in India?
Margin requirements vary by stock, but most active stock futures need 1 to 2 lakh rupees of margin per lot.

Can I hold a futures contract beyond expiry?
No. The contract ends on its expiry date and settles automatically. You can roll over to the next month before expiry if you want continued exposure.