Carry Forward Your Short Trades When You Trade In Futures
But what if you think that the stock prices are indeed going to decline and you want to make use of it. What if you want to short the asset and wait for a longer time to reap the benefits of a short trade?
Short equities but in the futures market
There is no restriction when you short equity futures though. Learn more about it here. Unlike shorting the spot market equities which cannot be carry forwarded overnight, when you short the equity futures you can keep the trade for a number of days. But ensure that the position is squared off before expiry.
This is why shorting is so popular in the futures market. Futures are basically a derivative which is impacted by the value of the underlying asset. So if the value of the stock that you want to short goes down its futures price will also go down. Thus if you are bearish on particular share and think that its price will go down then you need to short the stock futures to be able to carry forward the position overnight.
Shorting in the futures market
In the futures market, you need to deposit a token amount called the margin when you buy a futures contract. When you short trade on the futures contact too you will have to deposit some margin money. The margin amount in both cases is usually the same.
It is important to know that shorting is one of the ways to make money in the market. If you just stick to taking long positions then you are missing out on some great shorting opportunities. Also, fear causes the market to move down faster and thus shorting is also considered to be more profitable than taking long trades.
When you short, you sell the stock first and then buy it later. You are profitable only when the selling price is more than the buy price. If the price goes above the price at which you shorted then you end up in a loss. The stop-loss has to be kept above the selling price.
Most exchanges let you short only intraday, which means that you need to square off any short positions before the trading day ends. You can not carry the short positions overnight if you are trading in the spot market. To make up for this traders use the futures market that lets them short and also lets them carry forwards the trade overnight.
The trader will have to deposit some margin money when they place trades on a futures contract. This could be a short or along trade. The computation in the futures market is a mark to market computation.