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Understanding futures trading: A beginner's guide

Futures trading can be an exciting and lucrative opportunity for investors, but it can also be complex and risky. If you're new to futures trading, it's essential to understand the basics before you start investing.
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What are futures contracts?

A futures contract is an agreement between two parties to buy or sell an asset at a predetermined price and time in the future. Futures contracts are standardized, which means that they have uniform specifications for the size, quality, and delivery of the underlying asset.

Futures contracts are traded on exchanges, such as the National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX), and are used by investors to speculate on the price movements of commodities, currencies, stocks, and other financial instruments.

How do futures contracts work?

To enter into a futures contract, you need to place a margin deposit with a broker or exchange. This deposit acts as collateral and helps to ensure that you can fulfill your obligations under the contract. The margin requirement varies depending on the contract specifications and the exchange rules.

When you buy a futures contract, you're agreeing to take delivery of the underlying asset at a specified price and time in the future. Conversely, when you sell a futures contract, you're agreeing to deliver the underlying asset at a specified price and time in the future.

Futures contracts are settled daily, which means that the gains or losses from your position are added to or deducted from your margin account. If the price of the underlying asset moves against your position, you may need to deposit additional funds to maintain your margin account.

What are the benefits of futures trading?

Futures trading offers several benefits for investors, including:

1. Liquidity

Futures contracts are highly liquid, which means that you can easily buy and sell them on exchanges.

2. Leverage

Futures trading allows you to control a large amount of the underlying asset with a relatively small margin deposit. This can amplify your returns but also increase your risk.

3. Diversification

Futures trading enables you to diversify your portfolio by investing in a range of assets, including commodities, currencies, stocks, and bonds.

4. Price transparency

Futures prices are publicly available, which provides investors with transparency and helps to prevent price manipulation.