How is Futures Trading Different from Margin Trading? (2024)

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RISK DISCLOSURE ON DERIVATIVES

9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
On an average, loss makers registered net trading loss close to ₹ 50,000.
Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.

SEBI study dated January 25, 2023 on “Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment”, wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22.

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FAQs

How is Futures Trading Different from Margin Trading? ›

Here are the key differences: Ownership of Assets: In margin trading, you actually own the assets you purchase using borrowed funds. However, in futures trading, you do not own the underlying assets; you are only speculating on their price movements.

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How is futures trading different from regular trading? ›

While futures can pose unique risks for investors, there are several benefits to futures over trading straight stocks. These advantages include greater leverage, lower trading costs, and longer trading hours.

What is the difference between margin and trading? ›

To trade on margin, you need a margin account. This is different from a regular cash account, in which you trade using the money in the account. With a margin account, you deposit cash, which serves as the collateral for a loan to purchase securities.

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Can you trade futures without margin? ›

initial margin. A certain amount of money must always be maintained on deposit with a futures broker. Traders establishing a new futures position must put up the initial margin requirement. However, once the position is established, the trader is held to the maintenance margin requirement.

What is the difference between margin trading and perpetual trading? ›

Differences: Market Type: Margin trading occurs in the spot market, where assets are bought and sold for immediate delivery. Perpetual futures, on the other hand, are traded in the derivatives market with no fixed settlement date.

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How is futures different from margin? ›

Margin trading is one where you essentially take a loan to take a trade and pay interest on the loan. Futures trading is one where you trade using futures contracts by simply paying a deposit. There is no time duration on a margin trade – you can hold it as long as you want to stay in the trade.

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How are futures different from trading spot? ›

While spot prices are specific to both time and place, in a global economy the spot price of most securities or commodities tends to be fairly uniform worldwide when accounting for exchange rates. In contrast to the spot price, a futures price is an agreed-upon price for future delivery of the asset.

What is a disadvantage of margin trading? ›

The biggest risk from buying on margin is that you can lose much more money than you initially invested. A decline of 50 percent or more from stocks that were half-funded using borrowed funds, equates to a loss of 100 percent or more in your portfolio, plus interest and commissions.

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Why is margin trading good? ›

Using a margin account, you can use the securities in your account as collateral for a loan to pay the cost of exercising your options. This enables you to avoid selling securities and incurring a taxable capital gain, or using up all of your available cash.

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Does futures trading have leverage? ›

Narrator: As you can see, futures can allow you to leverage a relatively small amount of capital to take a position in a larger underlying asset. Because of this leverage, small changes in the price of the underlying asset have a much larger impact on the futures contract.

Do you need $25,000 to trade futures? ›

To apply for futures trading approval, your account must have: Margin approval (check your margin approval) An account minimum of $1,500 (required for margin accounts.) A minimum net liquidation value (NLV) of $25,000 to trade futures in an IRA.

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What is the best futures trading platform? ›

Best online brokers for futures trading

Interactive Brokers: Best for investment offerings. Charles Schwab: Best for beginners. TradeStation: Best for trading costs. tastytrade: Best for active traders.

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Who pays margin in futures trading? ›

Introduction. The buyer or seller of a futures contract is required to deposit part of the total value of the specified commodity future that is bought or sold – this is known as margin money.

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Can you lose more than you invest in margin trading? ›

On its website, it says that margin accounts "can be very risky and they are not suitable for everyone." Before opening a margin account, the SEC suggested that investors should fully understand that "you can lose more money than you have invested," and they may be forced to sell some or all of their securities when ...

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Is margin trading better than regular trading? ›

Advantages and Disadvantages of Cash Trading

Remember, margin accounts involve borrowed capital. This means there is an additional cost associated with these accounts. Traders who use their cash accounts end up saving money in interest costs that they would pay to use margin accounts.

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What is the point of futures trading? ›

Futures trading can hedge the price moves of the underlying assets.2 The goal is to prevent losses from potentially unfavorable price changes rather than to speculate.

Why do people trade futures instead of options? ›

Futures have several advantages over options in the sense that they are often easier to understand and value, have greater margin use, and are often more liquid. Still, futures are themselves more complex than the underlying assets that they track. Be sure to understand all risks involved before trading futures.

What is the difference between trading stocks and futures? ›

People who are new to futures markets are sometimes unclear about the differences between futures and stocks. Although futures and stocks do have some things in common, they are based on quite different premises. Futures are contracts with expiration dates, while stocks represent ownership in a company.

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What are the pros and cons of futures trading? ›

The most prevalent benefits include simple pricing, high liquidity, and risk hedging. The primary disadvantages are having no influence over future events, price swings, and the possibility of asset price declines as the expiration date approaches.