The Nifty Fifty is an index of fifty companies listed on the National Stock Exchange (NSE) of India. Trading in Nifty futures is quite risky but beneficial at the same time. Are you planning to invest in the Nifty Fifty? Before doing so, it is important to know a few things. But first, let’s take an overview of the Nifty Fifty index and Nifty futures.
A Quick Overview of the Nifty Fifty Index and Nifty Futures
The Nifty Futures is a financial instrument that gets its value from a related asset, i.e., the Nifty fifty index. So, the Nifty Fifty index is proportional to the Nifty Futures contract. If the value of the index rises, so will the value of the futures contract; if the Nifty falls, so do the Nifty futures.
A buyer or seller has the right to trade the Nifty Fifty index at a predetermined price at a future date. But before you invest, there are a few things you should know.
7 Things to Know Before Investing in Nifty Futures
- Don’t make excessive investments.
You never pay the entire amount when buying or selling a nifty future. Instead, you have to pay a margin of only 10% in normal trade and 5% in intraday trade.
As you only pay a part of your investment, you may end up investing in many contracts. If the market goes as per your expectations, you will gain. But if the market’s decisions go against you, you will face losses. So, prevent yourself from investing.
- Look into open interest data before taking a position.
Before investing in Nifty Futures, one must look into the open interest data, because the data provides a clearer picture of the trend accumulation. It tells you whether the investment is heading toward the longer side or the shorter side.
For example, if the number of contracts sold is higher than the number of purchases, the market will be bearish soon. But if the contracts purchased are higher than those sold, the market will be bullish soon. Taking both situations into account will help you with decision-making.
- Know the counterparty’s perspective.
There are two parties involved in Nifty futures contracts. One is the buyer of the contract, and the other is the seller (counterparty). It is crucial to understand the intention or perspective of the counterparty to know the reason for the price levels. For this purpose, open interest data will provide you with the necessary information. In short, understanding the counterparty perspective clarifies the Nifty Futures investment.
- Be watchful of overnight risks.
Profits and losses are an integral part of investing in Nifty futures. Whether you are buying Nifty futures or selling them, there is a risk involved on both sides. Many buyers and sellers think closing stop-loss deals during the day is the only side of Nifty Futures contracts. But there is another side to the coin: an overnight risk that occurs in the after-hours of the market. And these overnight risks are way riskier than those of stocks.
For instance, if you invest during the day, there may be a downward slope at night due to changes in market factors. Thus, be watchful of overnight risks.
- Make sure the future spreads are marginal.
The “spot” refers to the current security price at which you buy or sell at a particular time and place. The difference between the spot price of Nifty fifty and the future contracts of Nifty is called the “future spread.” It is necessary to be cautious of this spread while trading Nifty futures. For instance, the market may behave positively or negatively. When this happens, you shouldn’t trade because it means that future contracts are either too expensive or too cheap.
- Keep an eye on extra costs and related tax implications.
Investing in Nifty Futures comes with some extra costs, such as statutory and brokerage fees. These costs have a strong impact on your breakeven point (the point where the total cost of operations is equal to total sales or revenue). The tax applies to Nifty futures as well. Any profit or loss in Nifty futures is a capital profit or loss. These carry tax implications with them. Keep an eye on these extra costs to save your money for future investments.
- Try to understand the different margins.
While buying or selling nifty futures contracts, there’s always the possibility of profits or losses. Yet, while stop-losses are essential in trading, you should also understand the margins before investing. The initial margin for the contract includes two margins: the VAR (value at risk) and the ELM (extreme loss margin). As the ELM is no longer optional, the broker should collect both of these margins. Besides, you have to pay MTM (mark-to-market) margins daily to ease your capital allocation.
Investing in Nifty Futures is quite a challenge for newbies. Moreover, experienced investors are familiar with the ups and downs of the market. For both newbies and veterans, keeping these seven things in mind will make the journey easy and profitable.
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