Let’s say Vivek has Rs.15,000 rupees to invest today, and his research indicates XYZ company’s price will rise soon.But his meagre amount in hand today is not going to cover outright purchase of a sizeable lot of XYZ Ltd.’s shares right away. So instead of losing out on the chance to profit.
He invests in a Futures contract in XYZ Ltd. for a lot of 250 shares @ Rs. 500 per share....by offering margin money for the contract @ 10%, i.e. Rs.12,500 rupees.On the expiry date of the contract, as per his research, the price of XYZ Ltd. has risen to Rs.750 rupees.
So, upon settlement, the trading exchange credits the profit minus his margin money.
In effect, Vivek has leveraged 12500 rupees via a Futures contract, to maximise his gains and pocket a profit.
Of course, if the price on the expiry date falls lower than the Contract value – the trader pays the exchange the shortfall.
Futures Contracts let you maximise the earning potential of your money by booking future-dated purchases in desired companies or commodities for a limited investment now.
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Investment in securities market are subject to market risks, read all the related documents carefully before investing
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