HOW IS FUTURES TRADING DIFFERENT FROM MARGIN TRADING?

Last Updated: 9 Jun 2022

One of the popular confusions for traders is margin vs futures. Are they the same? To understand the margin vs futures debate, remember that margin trading is normally applicable to cash markets while futures trading pertains to the futures or F&O market. Let us now understand in detail the difference between futures and margin trading.

HOW IS FUTURES TRADING DIFFERENT FROM MARGIN TRADING?

To understand the difference between futures and margin trading, let us first look at what margin trading entails, and then we turn to futures trading.

In margin trading, it is still trading in the cash market. The only difference is that you don’t pay the full consideration but just part consideration. For example, today, if you want to buy 1000 shares of Reliance at the current market price of Rs.2250, then you need to pay Rs.22.50 lakhs by T+1 day. If you don’t have that kind of money, you can opt for margin trading. Now let us understand margin trading at two levels.

1. Margin trading for pure intraday. In this situation, you can trade on the long side or the short side and close out the position in the cash market on the same day. When placing the order in the system, the trader has to select an MIS order and that will be automatically treated as an intraday order. The onus is on the trader to close the position during the day and the margins are much lower in an intraday margin trade. However, if the trader does not close the position by 3.15, the broker will use the RMS facility to close the position out.
2. Another form of margin trading is where the broker funds your position. How does this work? Say you want to buy 1000 shares of RIL for Rs.2250. You only have Rs.9 lakhs available with you. So, you put in the Rs.9 lakhs as your margin and the broker funds the balance of Rs.13.50 lakhs. This position can be held for up to 1-2 months based on your agreement with the margin trading broker. For the period the broker funds you, you will have to pay interest to the broker.

Margin trading on the short side only works for intraday, not for delivery where broker funds. That is the limitation. Another problem is that your interest cost continues to mount irrespective of the stock price movement.

Futures trading entails buying and selling in the F&O market and you can take positions up to 1 month in a near month contract or up to 2 months in a mid-month contract or up to 3 months in far month contracts. These are all subject to available liquidity. You can trade futures on the long side or the short side and there are no restrictions except that you must pay the margins for initial margins and regular MTM margins till the position is open. That is the essential difference between futures and margin trading.

WHAT IS MARGIN TRADING?

Margin trading can either be intraday trading by paying a small margin on the position. However, such positions have to be mandatorily closed out on the same day. Alternatively, margin trading can also be for delivery wherein the broker funds the non-margin position.

HOW DO A FUTURES CONTRACT WORKS?

A future is a contract where the trader can either opt for a long position or a short position based on view. Once the position is taken, the position can be squared off by taking a reverse position in the same contract.

Frequently Asked Questions

Are the charges for Margin trading and futures trading different?

Margin trading entails cost of equity brokerage and interest costs. In futures there is no cost other than the brokerage, statutory charges and the notional cost of funds allocated. This is one more area of difference between futures and margin trading.