Beginner's guide to Futures trading in the stock market | #Learn2Trade Session 8
Welcome to class 8 of learn2 trade series. I am running this on my channel where I am teaching Annapurna how to trade I am trying hard and Annapurna is happy with this effort Yes sir, it’s fun. Good good It’s fun till you’re learning It’s a different fun when you put in your money and see the minus It’ll be good with you. Just be positive, extreme level of positivity That you can do it, you can do it Whenever you see market in the morning, tell yourself that you can do it Then start trading in the market as you can do it Your subconscious mind should be extremely positive And say bye to all the negative people around you Leave my life, you have no role here Trading is very intense Do you play sports? No sir No sports? I don’t play sports Anything? Chess, TT? I play TT While playing TT do you feel very competitive? I play a friendly game with my brother Friendly game, no competitive game? Everyone has their own style I don’t like to compete with people, I love games where I can compete with myself Like swimming, I am actually a district level swimming champion I used to swim 2 to 3 hours a day in class 10, class 12 As I love to challenge myself I don’t enjoy games where I have to compete with others, maybe I’ll lose My latest passion is cycling You must be seeing my pics I do see, 30 kms, 20 kms All these are challenges that I am taking for myself, and I am beating myself Trading is similar. It’s a hyper sports where you’re challenging yourself everyday
What are the things required to become a good sportsperson? Let’s take an example, Not mine Virat Kohli! Do you like him? Yes. He’s awesome Why Virat Kohli is Virat Kohli? Because of his sportsmanship, because of the hardwork that he puts in And hardwork is 360 degree hardwork. It is not just the cricketing hardwork Look at the way he keeps himself fit. Look at the way he carries himself, Look at the way he’s keeping such cool, calm and composure Although I like Mahendra Singh Dhoni a lot because of his temperament But Virat Kohli has a different aggression, different level of temperament All these are people you should learn from and get inspired from, So if you’re thinking of trading then consider it as a sports activity You need to keep upgrading yourself in terms of skillset If you don’t know a shot style, then you need to learn it It can’t be like you don’t know how to hook. For example, Sourav Ganguly was never comfortable in hook shorts
But then he learned and at some point he answered people that don’t give me bouncer, I’ll hook. It’s similar in trading and the most important is the temperament In the last video, I told you about the subconscious mind and how you have to prepare yourself. To remain very strong during tough times For example, some days back, some issued happened in NSE and exchanged closed for sometime and there was no trading I saw a lot of retaliations in social media where people were abusing exchange, and the broker. Claiming that they’ve lost money
I just want to say that these events are possible and the real test of the character comes. The way you react to such situations. Any situation can arise Because ultimately your life is a cumulation of probabilities When you leave home for office, is it certain that you’ll reach office? No Ultimately its technology and anything is possible. And if you react in a negative way in such situations, then it talks a lot about your character Only strong characters make money in the stock market, not the weak ones They are here to lose money and go back with experience Again, a small lecture before starting the video. Did you watch the last video? How was the learning? You must have watched it again Yes sir, it was fun. Our discussion on sector rotation But in the start of the video, you had mentioned derivatives
You told me that you’ll explain later but if we can cover it in this video. My mistake. It was a mistake to use this word. Everyone want to know about derivative Let’s introduce you to derivatives. But don’t trade in it now as it can be dangerous when traded without understanding it properly But it’s important to understand the concept. If you want to trade in the stock market, you have to adapt to derivatives You can’t say that I’ll make big money by trading in the cash market Because when you trade in the cash market, i.e., trade on delivery basis
When you buy and sell the same day, it’s intraday But you can’t make big money through intraday in the cash market You take delivery today and sell it after some days, i.e., swing trading. You can make money through that but you need money to get delivery Suppose you bought 100 shares of Reliance Reliance’s price is around 2100. So 100 shares of Reliance will cost you Rs. 210000 Where will you get that money from? How much balance do you have in the broker account? Not that much. How much? Currently I have put in Rs. 50,000 If you’ve put in 50000 and you want to take position in 5 stocks Then you will put in 10000 worth position in each stock. If you’re buying Reliance, then 2100, so 10000 divided by 2100 5 shares. How much can you earn through 5 shares? You can’t make a lot of money in absolute terms with such small amount You’ll be demotivated that you’re putting in so much effort And you’re barely making Rs. 1000 in month Let’s stop it and not trade anymore
Either you enter the market with a good size of capital 50,000 is a good amount to learn, but if you have Rs.5,00,000 And you’re generating 5% return a month, which is conservative as a trader. Then you’re earning 25000 a month, which is a decent figure You feel motivated to be in the market when you earn 25000 a month. If you’re just earning 2500 a month, then what’s the point in trading? It’s just a waste of time and what’s the biggest currency of your life? Time. You can never get back time People don’t understand this whoever is watching TV or are active in Twitter. Now there are discount brokers, so you just login to a trading terminal And keep watching the price. You’re wasting time by just watching the price. This is the time when you can do something
You’ll regret wasting your time after 5 years Broker, exchange and the regulator are happy, who is sad? You as you are investing your time It’s important to have a bare minimum capital You can’t earn anything with Rs. 50000 in the cash market. But you can do a lot if you get leverage Derivative is an instrument which gives you natural leverage that you can create a higher position with limited amount How was this concept created? Who was the madman to start the derivative? When farmers produce anything, they carry a risk, what risk? By the time I plant seeds and sow them, it’ll take a lot of time. I need to plant the seeds today and I need money for the entire process But what if I don’t get the output? If there’s rain or flood, It’ll ruin my output Money gets tied up without any output incurring losses for me The concept of hedging was introduced to save this process. Hedging is when a farmer makes a contract with a mill owner
That I’ll sell this to you after two months and you write it down that you’ll pay a fixed amount in exchange The farmer knows that he’ll spend Rs. 100 in the entire process And asks the mill owner to commit that he’ll buy that produce at 125 after 3 months. Make an agreement Farmer is happy. Now if there’s flood and everything is ruined, who’ll have a problem? Both. Why will the farmer have a problem? He cannot fulfill
But the commitment is made, a price has been booked, he has to give. A loss for mill owner, did farmer lose? He lost crops, but he got money How did he get money? You were right, they both incurred loss. Farmer is unable to provide the crops and the mill owner won’t pay for it In second situation, if there was a flood but there are limited crops and the price of goods has went up because of limited supply Simple law of demand and supply, but farmer is able to provide He has enough quantity to supply The mill owner requires the produce to run the mill but the price in the market has shot up. But he has a contract with the farmer at a fixed price So it’s the farmer’s obligation to sell to the mill owner at 125 because of the contract. So this is hedging for the mill owner There was a hedging mechanism defined for both the parties that you come into a contract that you need to supply in a fixed time frame at a fixed price This was the first derivative contract. It’s known as futures in derivative terms
It was started as forwards. Forwards and futures are both separate contracts .There’s a minor difference but you should understand I can come into an agreement any day at any fixed price is known as forwards There’s a fixed date for delivery pre-decided by the exchange with the quoted price is known as futures I have a question, If the fixed price is 100, then is it the current value of 100 or the future value of 100 It is the future value of 100. They’ll have to pay 100 when the product is delivered They have decided the value of the future in the present date What’s the risk? Rsk is if the mill owner doesn’t oblige to pay the farmer on the future date That’s risk as he can refuse to oblige. Then you need to approach the court To reduce the risk, another concept was introduced to commit money as margin That if someone fails to meet the obligation, then they will lose out on the margin It’s like advance, so if I have an obligation of Rs.100, then let’s deposit Rs. 10 as margin You deposit your Rs. 10 that it’s your obligation to supply the goods and they deposit their Rs. 10 as an obligation to pay This Rs. 20 is given to middleman. Maybe a village head that we’re giving you Rs. 20 and you’re a confirmation to this contract
That the farmer has to supply, if he doesn’t then forfeit the amount and pay the mill owner Or if the mill owner doesn’t pay, then forfeit his amount and pay the farmer There’s a mediator in between. Let’s understand this concept from the exchange point of view Financial instruments like shares, gold, silver like I had told you. Even they carry the risk that price of the future can go up or down It’s known as price risk. There are 2 types of risk - price risk and credit risk. Let’s not talk about credit risk in the financial asset As there’s not much credit risk in the shares Price risk is when the price can go up or down in the future Derivatives was introduced to reduce the price risk Where the same instruments like Reliance, Nifty which is traded in the spot market Future contracts of such instruments are also available. Not forward, futures. Forward can be on any day. Futures is when it is listed on the exchange and it’s going to expire on one specific date. Expiry is when both the parties need to meet the obligation
As a trader you benefit. I have one question, in the farmer example, the farmer would give the output And the mill owner would take the crops, so in this do we trade shares. Logically, it should be shares If you want to buy Reliance today but you don’t buy it today I’ll buy it after 2 months so someone quote the price after 2 months to me.
So the price post 2 months are quoted in a different segment in the exchange. It’s known as F&O segment, futures and options segment Forget options for now, in this derivative segment, they quote the future price today The day the contract expires, the person with the buying obligation will buy the share and pay money the person with the selling obligation will sell the share and take money Share means physical shares. Who decides the price? Market decides the price. Market forces decide the future price of Reliance What if that price is not the same then? It’s not a fixed price, it can be any price, and they have to buy it regardless No, if a contract is made, then the price is fixed. If the price goes up, then it’s your benefit if you’ve bought it If the price goes down, then it's your loss Price can change. Yes, it can
There can be any situation after 2 months. If you’ve bought Reliance futures at 2000 which will expire in March Let’s go to the exchange website Website of nseindia When you go there, let’s pick up any one stock. Let’s search for Reliance only Reliance Industries. Here equity and derivatives are segments There are different types of contracts in derivatives. There are futures contracts and options contracts Let’s not talk about options now The price of Reliance in the spot market (cash market) is 2107 If you buy now then after 2 days. Its T+2 settlement. You’ll get share in your demat after 2 days and you need to pay then
First you pay and then you get the share. It’s called pay-in when you pay and called pay-out when you get the share So 2107 is spot, means T+2 The expiry on 25th March. Why 25th March? Exchange has set the rule that the expiry date will be the last Thursday of every month. The price of Reliance on the 25th of March is Can you see the bid and ask? I can’t see it here. If we want to see the bid and ask live, then let’s go here. Here it is.
You can see the contract on the trading terminal of any broker. The current bid and ask is 2124 and 2124.60 The spot is 2107 and the future of March is 2124. Future is expensive, future will be expensive only right, why will it be cheaper? The future price of anything will be more expensive. There’s something called Time Value of money The Rs. 10 you have now, will be worth more after 10 days
As interest is added to it. I will explain the concept of why the value of future is up or down This is March contract Feb contract which is going to expire now. It’s going to expire today, the day we are recording It’s price is 2110 and spot is 2107 The price on the day it’s gonna expire is higher by 2 to 3 There are different expiry contracts like this The expiry contract is for 3 months, it’s available in India in Equity Near month, February contract, next month, March contract, Far month, April contract You can make position in any one of the contracts If you want to buy, then take future If you want to sell then you sell the future You had asked me in the previous video about sector rotation That you can buy and sell. You can’t sell in the cash market as you you have to deliver the shares. But you don’t have the shares, so how will you deliver the shares?
But you said that it’s possible It’s possible in a new system started by the Exchange recently. It’s called borrowing. It’s called SLB Security Lending and Borrowing window where you can borrow the share from someone who has it in exchange of interest But it’s not very active now. It’ll take time to be active But if you want it short, meaning you want to sell a share Then you need to have it if you want to sell it in the cash market or you can sell it in derivatives. You can create a sell position in futures In future contract as you’re committing to sell in the future. Did you understand the futures? You can’t trade in 1 share in the futures Exchange has standardized a minimum number of shares for futures trading It’s called lot size. There was no limit in the cash market
I can trade in 1 share as well, not less than 1 There’s a minimum lot size when you trade in the futures Not all stocks are available in the futures. Very limited stocks are available There are certain criteria of the exchange which need to be met to be launched in futures, options, or derivatives You can trade in limited stocks. There are individual lot sizes in each Typically the lot sizes are huge. It’s value is between 5 lac to 10 lac
But you just have 50 thousand. You can’t get the exposure of 5 lac with 50000 No. So if you want an exposure of 5 lac, then you need to pay 20% to 25% margin If you want to take position in it I had said that you need to pay margin, which is like a security That you have fixed an obligation and you’re committing that amount If you consider 20% margin on Rs. 5 lac, you need to put 1 lac in the exchange if you’re taking a position worth 5 lac This is the rule of 20% margin. But there are some stocks which are volatile and the risk is higher So the margin requirement also goes up If we take today’s example of Reliance We see that the price at expiry is 2110 The expiry on Feb is trading at 2110 Right now the value in 2107 This is on exchange’s website. There is delay So it’s possible that both the prices are same The price on expiry is the spot price Today’s expiry price is the spot price, so it’s the same As you can see that the price of Feb contract The price of march contract is 2124 and spot is 2107 As march approaches, this gap will be 0 A lot of people trade in the gap They buy at spot and sell in the future and if the gap lessens they reverse the position This is a trading strategy known as the arbitrage strategy So the trading firms in the professional market use this Your requirement is to take more position with 50000 It’s not sufficient to take a position of 50000 It can only happen if you square up derivatives Futures is a very big thing in derivatives with a high risk Because if you take a position worth 5 lac with 50000 and if the stock falls by 10% 10% of 5 lac, 50000, so you lost all your money Leverage works both ways. There are advantages to it as well as disadvantages
Some brokers provide leverage in the cash market as well You don’t need to trade in the derivatives If you ask them to give you exposure of 3 lac with 50000, they let you And they charge an interest on the additional 2.5 lac which they lend you. That’s known as margin funding You might feel more confident after some time and want to trade aggressively And might need loan. Margin funding is sort of a loan provided by the brokers As per the client’s risk profile Discount brokers don’t provide this But if you go to a traditional broker, bank-based broker like Kotak. They provide loan. You use your money and we will provide additional capital To trade using leverage in the cash market I will need a good amount of capital to trade in the derivatives You will be able to trade better in the derivatives with more capital The risk is very high when you trade with small capital That there are high chances of losing your entire capital I’ll never advise to trade at this stage This is our 8th video You asked, that’s why I introduced derivatives But my intention for you is no to trade in derivatives I have discussed futures which is complicated If we talk about options, that’s much more complicated But you can deploy small capital in it But there are high chances of losing that small capital My advise would be to trade in the cash market Don’t leverage now. Trade 2 years without leverage
You just have 50000, but there are others with huge amount of money. Convert 50000 to 1 lac bit by bit and then you can speak to people You can talk to your father or anyone that you’re good in it You’ve converted 50000 to 1 lac, you have a science They can give their money to you to manage That take 5 lac and manage and we will share the profits It’s not required to leverage your capital. You can leverage by trading using other people’s profit Start with small capital. 50000 is not that small that you have to think about it Don’t measure returns in absolute terms for the next 2 years You’ll feel that you’re only earning 1000 but that 1000 is a very big amount As it’s earned while learning Target to convert 50000 to 1 lac in the next 2 years Generate 5%to 6% returns each month, even if it’s small Then think about leveraging after you get that confidence You can either ask a broker for leverage in the cash market Or you can naturally leverage by participating in the derivatives Or you can leverage by managing someone else’s money and sharing the profits This is a basic introduction on derivatives. I will not go deep into it now There is no limit to it and it’s not just in equity It can be in commodities, currency like USDINR If you go to NSE, there are various segments here Now that you’ve mentioned commodities, please give a small introduction on commodities as well I’ll tell you the basics about commodities Commodities can be anything like gold, copper, silver etc. There can be agri-commodities as well like gram, guar seed etc. Any commodity that’s a raw material
People need that commodity to run their factory. There’s a risk The factory owner has a risk that if the price of the raw material goes up, so I want to hedge it Any commodity can be hedged. There’s an exchange in India known as MCX which is the biggest in commodities You will see all the contracts of the commodities under Products. What contracts are those? Future contracts There’s no spot trading in commodities through this Spot trading of commodities is done through mandis The act of mandi has changed now as govt is trying to reduce the power of mandis But if you you outside the city, there are huge mandis of commodities There’s a place called Tarkeshwar near Kolkata in Bengal Have you heard of Tarkeshwar? Yes They have mandi of potato There are huge mandis where people put their small wholesale shops and sell Those wholesaler collect it from the farmers, it’s a value chain Farmer to mandi to our homes through retailers This is futures contracts. This is derivatives exchange You can trade here if you want to take position in derivatives As a common person why would I want aluminium or copper or lead or nickel. Very good question, as a common person, why do I care
Why should I trade in it? When we have money and want to become trader in the market Our only purpose is to make money by trading. It doesn’t matter whether you’re trading in Reliance or aluminium, or USDINR, or orange juice I thought when we’re trading in commodities, they get transferred. Yes, ofcourse it gets transferred So you need to deliver the commodities on the expiry date. If we trade in crude oil, which is big in US where people trade in raw oil If you get the obligation to receive then you have to take in a ship. Where will you keep the ship at home? So generally traders square up the position few days before the expiry date Or they rollover. Square up means that I’ll sell if I’ve bought the contract
And rollover means that if I have January contract then I will sell that and buy February contract So the position has been rolled over to the next month I am not supposed to keep the contract open on the delivery date if I get the delivery, where will I store the oil tanker Each instrument has a dynamic which is important to understand before we trade in it, be it commodities, USDINR or rupee If you go to NSE, you will see currency there, click on Market Data. It’s complicated in the new website Go to Derivative market. There’s equity derivative and currency derivative Although even they have commodities, but it’s not very active USDINR is also traded, GBP, euro, all are traded Now you’ll ask why should it matter to you, why are you showing me this? You know the answer to this. You’re a trader
The more assets you track and the more assets you intend to trade in. The more your hedging yourself, you’re hedging the risk as well You can earn on either equity, commodities, or currency Eventually you should aspire to become a multi asset trader That you can trade anything. Wherever you see opportunity, you enter, earn and exit We will discuss it over time My intention is to tell you about commodities, currency in this series And eventually you track equity, commodities and currency And capitalize wherever you get opportunity This was class number 8, this was a very small video, very cute As derivatives is a very big instrument and you should start with cuteness so that you don’t get pressure This was an introduction video on derivatives where I have discussed currency and commodities as well There will be elaborate discussion on it. There will be detailed videos on Futures, Options And Annapurna will understand her risks, rewards and their treatment better. Be hooked to this series, I’m having fun teaching, I hope you’re enjoying it as well and share with 200 people so that they also enjoy and learn Thank you for watching this video. Stay tuned. Bye
2021-03-08 08:37
