Future is a binding contract between two parties to buy or sell an asset at a set price on a specific date in the future.

Unlike an Option, where you have a choice, a Future is an obligation. If you hold the contract until the end, you (or your broker) must settle it, regardless of whether you are in profit or loss.

Who uses Futures and Why?

In the Indian market, participants generally fall into three buckets. Each has a very different reason for being there.

1. The Hedgers (Risk Managers)

These are usually businesses or individuals who actually deal with the physical asset and want to protect themselves against price fluctuations.

Example A business owner expects to buy 100 tons of raw material in three months. If they fear prices will skyrocket, they buy a Future contract now to “lock in” today’s price. If the market price goes up, their profit on the Future contract offsets the higher cost of the physical material.

2. The Speculators (Profit Seekers)

These are traders who have no interest in the actual asset but want to profit from the price movement.

In India, to buy ₹10 Lakhs worth of Nifty exposure, you don’t need ₹10 Lakhs. You only need to provide a Margin (roughly 10-15%, or about ₹1.5 Lakhs).

This “leverage” allows traders to control large positions with small capital. If the price moves 1% in their favor, they could make a 10% return on their actual capital. (Note: The reverse is also true and can wipe out capital quickly).

3. The Arbitrageurs (Efficiency Seekers)

These traders look for tiny price differences between two different markets.

Sometimes, a stock might be trading at ₹500 on the “Cash” market but the “Future” contract is trading at ₹505. An arbitrageur will buy in the cash market and sell in the futures market simultaneously to pocket the ₹5 difference as the prices eventually converge on expiry day