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6 Crucial Reasons to Trade Equity Index Futures

Equity index futures trading has grown into a popular alternative to traditional stock trading. Equity futures introduce sectoral or market-wide index contracts traded by institutional investors, retailers, individual traders, and other categories of market participants. The instrument comes with a set of crucial benefits letting investors act in either long or short-term perspectives as well as avoid potentially risky assets.


In this article, we will review some of the main advantages to trade equity market futures.

#1 – Asset Consolidation and Risk Management

Let’s say, you want to invest in stocks that refer to the banking sector. Apart from looking for a separate stock issuer (PSU or private banks) that is sometimes quite hard to find, equity market futures make it possible to take a consolidated view of the entire banking sector, which also provides some portfolio diversification opportunities.

#2 – Long and Short-Term Trading Perspectives

It does not matter what trading side you prefer. One can opt for either long or short-term trading approaches. Equity index futures trading will suit both. Some regional markets have restrictions and limitations on how investors can act when going short on banking or other types of stocks. Besides, there are always niche-specific banking risks.

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So, the best idea is to sell equity index futures on Bank Nifty. The approach will make it possible to overcome all obstacles and established limitations. The concept will work great for those who prefer trading stock index futures in India, for example. Selling nifty futures here is a good potion if you want to avoid risky stocks as well as niche-specific challenges.

#3 – Trading with Lower Margins

Indices trading always means trading on margins. However, with equity market futures it is possible to lower them down. For example, margins on individual stocks tend to be higher when compared with Bank Nifty and Nifty indices.

This is due to the fact that indices are not generally a stock but a set of stocks, which automatically results in natural diversification. Lower margins mean lower risks. Besides, it reserves even more room for investors to take potentially profitable positions with a lower amount of funds locked by the broker.

#4 – Equity Index Futures to Hedge Risks

The ability to hedge risks with equity market futures is one of the main advantages. It does not matter if you are an institutional or individual investor. At some point, you can find yourself holding a large portfolio of assets. The market promises to go down by about 10-12% because of a hike, for example. At the same time, you expect it to correct and return positions in 3 months.

Some investors would rather simply hold their assets, as the price fall seems to be a temporary situation. However, with equity index futures, you can sell Nifty assets and book your profit even when the market makes a negative move. When the situation recovers, you will definitely have a better off position.

#5 – Limited Risks

Equity index futures trading comes with limited risks. The issue of liquidity can often be observed when trading stock index futures. At the same time, institutional investors generally opt for index futures as a tool with minimum liquidity risks.

This fact makes the bid and ask price range a bit narrower, which makes index futures trading a safer alternative. At least, it provides more trading opportunities instead of getting stuck in search of at least minimum liquidity for assets you hold.

#6 – Lower Trading Costs

Investors who trade equity index futures face lower commissions and STT rates when compared with stock futures. What’s more, some brokers try to attract more customers by offering them a fixed package on trading indices. In other words, you get a more economical investment instrument.

The Bottom Line

Equity index futures can be a better alternative to traditional stock trading. They offer higher potential returns, lower costs, and investment flexibility in terms of risk management and timeframes. On the other hand, they come with certain risks related to the lack of liquidity, leverage, settlement, and delivery, and other risks you need to consider.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.