The Nifty Futures contract is a trading instrument that is based on the National Stock Exchange’s main index NIFTY. This contract is an agreement set in the future to trade in certain pre-fixed units of the NSE-50 index at a fixed price as per the contract.
It is a purely derivative instrument as it is dependent solely on Nifty’s valuation in the stock exchange and is dictated by no other parameter.
How is a contract formulated?
A Nifty Future contract is like a deal that is signed between two parties, wherein, the buyer party promise to buy the traded Nifty futures at a fixed rate on a date in the future from the seller.
If the exchange price of the NIFTY index increases, the seller suffers a loss and the buyer makes a profit. If the valuation of the NIFTY index decreases, the buyer suffers a loss and the seller makes a profit.
The NIFTY futures contract is cushioned by various margins including the SPAN margin and the exposure margin. SPAN (Standardized Portfolio Analysis of Risk) is a method of calculation of the margin amount that should be set aside in your trading account to cover any damage in case you suffer a loss.
The SPAN margin for the Nifty Futures is set at 5% of the value of the Nifty Futures contract. That is, you need to have an extra amount worth 5% of the contract value in your trading account. While the SPAN margin keeps changing with market risks and situation, Exposure margins are usually fixed for all kinds of Future indices.
Exposure margin is an extra margin that is applied on top of the SPAN margin. It is collected as a guarantee to safeguard the investment against unanticipated market changes.
This is done not to burden the broker in case of any losses incurred on an investment. For Nifty Futures, the exposure margin is set at 3% of the value of the contract.
That is if the futures contract is valued at Rs. 10 lakhs, a sum of Rs. 30 thousand will have to be set as the exposure margin.
What do you need to trade in Nifty Futures Contracts?
NIFTY Futures contracts do not create any ownership. That is why you don’t necessarily need to open a Demat account to be able to trade in Nifty futures.
You will, however, need a functional derivative trading account with a brokerage firm that is registered with the Securities and Exchange Board of India.
You can trade in a lot (roughly 75 units) of NIFTY indices or you can trade in even a single unit. These contracts can have a maturity period of up to 3 months maximum. Intraday trading in these contracts will result in shorter contract durations.
The SPAN and exposure margins calculated for intraday trading in NIFTY Futures contracts are also somewhat lower for intraday transactions compared to overnight ones and that is why it is a widely popular option among Nifty Futures traders.
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