What are the Advantages of Futures?

Last Updated: 4 Feb 2025

A futures contract is a right and obligation to buy or sell a contract at a future date at a price that is determined and agreed upon today. Futures are normally traded on a recognized stock or commodity exchange. Instead of buying Reliance stock, you can buy Reliance stock futures and instead of selling Reliance stock, you can also sell Reliance stock futures. In the equity market, the two most common types of futures are stock futures on individual stocks and index futures on select indices like Nifty, Bank Nifty, etc.

What are the benefits of futures trading? One of the key benefits of futures trading is leverage. In other words, one of the major advantages of trading futures is that you can pay a margin and get the same benefit of buying the entire quantity of stock. The other advantages of trading futures include speculation, arbitrage, hedging, etc. Let us now turn to the advantages of future contracts.

What are the advantages of futures contracts?

Here are the advantages of futures contracts:

1. Leverage: Allows investors to control large positions with a relatively small amount of capital.
2. Hedging: Provides a way for businesses to protect against price fluctuations in commodities and financial instruments.
3. Price Discovery: Helps in determining the future price of an asset, aiding in better decision-making.
4. Liquidity: Futures markets are typically very liquid, making it easy to enter and exit positions.
5. Lower Trading Costs: Compared to other investment options, futures contracts often have lower trading costs.
6. Standardization: Contracts are standardized in terms of quantity and quality, ensuring uniformity.
7. Risk Management: Effective tool for managing financial risk by locking in prices.
8. Accessibility: Allows small investors to participate in markets they might otherwise be unable to access.

What are the different types of futures contracts?

Here is a quick look at different types of futures contracts available in India

1. Stock futures are contracts on select individual stocks
2. Index futures are contracts on select representative indices
3. Currency futures are contract on currencies vis-à-vis rupee i.e., USDINR, EURINR, etc
4. Cross currency futures are contracts on two currencies, other than INR
5. Commodity futures, a contract on key agricultural commodities, industrial commodities, oil & gas as well as precious metals
6. Interest rate futures, a future bet on government securities
7. VIX Futures, a futures trade on increase and decrease in volatility

Frequently Asked Questions

What do you mean by liquidity?

Liquidity is the ease of entry and exit from a position in the market at low bid-ask spreads and without the trade impacting the price in a significant manner. Sufficient liquidity is a must before taking positions in futures.

How can speculators make money in futures?

Speculators take positions in futures based on their view. If they expect the stock or index to go up, they buy futures. If then expect to go down, they sell futures. They focus on booking short-term profits on such positions.