Buying A Futures Contract And What Happens Behind The Scene

Buying A Futures Contract And What Happens Behind The Scene

When you buy the futures contract you expect that the price of the futures contract will go up. You will have to buy the minimum lot size when you buy a futures contract.

You can buy the futures contract by calling your broker. You can also buy the futures contract online on the trading platform. What happens when you buy a futures contract?

Behind the scene

Validation of the margin

When you enter into a futures contract you need to deposit a margin amount. This is like an advance token amount. The margin amount is fixed and is a percentage of the contract value. If the margin amount is not sufficient in your account then you cannot buy the futures contract. So the software will first check whether you have sufficient money in your trading account and this will decide whether or not you can enter a futures contract.

Searching the counterparty

After the system checks that you have sufficient margin, it then looks out for a counterparty that is basically on the other end of your trade. There has to be a match between the buyer and the seller. The financial market will have many buyers and sellers.

The signoff stage

Once the margin is checked and counterparty found then the buyer and the seller will enter into an agreement. This is done digitally these days. So when one signs a futures agreement the buyer and the seller enter the future agreement to give consent to the other party to honor the obligations of the contract.

Blocking the margin

The margin required is then blocked off in the traders trading account. The blocked margin amount cannot be used to place any other trade. This money stays blocked as long as one holds on to the futures contract.

When these steps are completed you are now the owner of the futures contract. These steps look lengthy but in the real market, these steps are completed within seconds.

So when you say that you own 1 lot of company ABC future then this means that you have purchased a futures contract of company ABC and have entered into an agreement with the counterparty to buy shares at the predetermined price.

There is an expiry date that the futures contract has and the contract should be closed by that date.

Selling futures contract

Similarly, you could also short sell a futures contract in case you think the price of the underlying stock would fall. This is also done in the same way. The system will look for a buyer for the futures contract and you also need to have the desired margin in your account to short sell the futures trade.