If you are new to the stock market then you must have heard words ' stocks and futures ' and wondered what is futures. One main thing to understand is that trading in futures involves a lot of risk is not same as trading in stocks.
Here is the comparison between the two :
Still confused ? Don't worry. Now let us understand futures contract with the help of an example : Consider that this is the month of February. You have been told by your friend to trade in futures for better profits. The reason is because you will have to pay less for number of stock futures purchased and only you will have to pay ' margin money ' plus lower commission fees. This means that you can buy more shares for a lesser price. So you decide to buy futures of a stock called SSS for the month of march. You call your stock broker and ask about details of stock futures of SSS. You are told by your broker that one ' lot ' of SSS contains 75 shares and ' margin money ' per ' lot ' is 20000 rupees. You have 50000 rupees in your trading account and current market price of SSS stock futures for the month of march is 1000 rupees. So you decide to buy two lots of SSS futures which means 150 shares. Once you buy the two ' lots ' 40000 rupees ( 20000 per lot ) goes from your account in the form of ' margin money ' plus the brokerage. Now you have less than 10000 rupees left in your account. Suppose the price of share of SSS increases by 100 rupees then you will have option of taking profit of 15000 rupees ( 150 * 100 ) by selling those two lots. Now if you sell the futures and take the profits ( 15000 rupees ) then it means that you have made remarkable profit of 30 % within a month. However, you must have noticed that the stock price had risen only 10 % which normally happens in the stock market. Now let us take the same case but instead of stock price rising by 100 rupees we consider that it has fallen by 100 rupees. As soon as the stock price falls by 100 rupees you can get a call from your stock broker. He may ask for deposition of more money as your loss has reached to 15000 rupees and that means after deducting 10000 rupees from your account you still have to pay 5000 rupees more to pay for the loss. this kind of call is called ' margin call '. If you don't have money to deposit then either you will have to sell the futures lots at a huge loss or even the broker can ( read will ) sell your futures lots. So in this case you will have to bear a huge loss of 30 % in a month. Also it is important to note that when stock prices fluctuate a lot then ' margin money ' is increased. So if in this case you had 60000 ( instead of 50000 ) in your account but ' margin money ' per ' lot ' had increased to 25000 rupees after few days of purchasing then also you would have landed in a similar position. So it better to understand the risks associated with trading in futures before going for it.
Here is the comparison between the two :
Still confused ? Don't worry. Now let us understand futures contract with the help of an example : Consider that this is the month of February. You have been told by your friend to trade in futures for better profits. The reason is because you will have to pay less for number of stock futures purchased and only you will have to pay ' margin money ' plus lower commission fees. This means that you can buy more shares for a lesser price. So you decide to buy futures of a stock called SSS for the month of march. You call your stock broker and ask about details of stock futures of SSS. You are told by your broker that one ' lot ' of SSS contains 75 shares and ' margin money ' per ' lot ' is 20000 rupees. You have 50000 rupees in your trading account and current market price of SSS stock futures for the month of march is 1000 rupees. So you decide to buy two lots of SSS futures which means 150 shares. Once you buy the two ' lots ' 40000 rupees ( 20000 per lot ) goes from your account in the form of ' margin money ' plus the brokerage. Now you have less than 10000 rupees left in your account. Suppose the price of share of SSS increases by 100 rupees then you will have option of taking profit of 15000 rupees ( 150 * 100 ) by selling those two lots. Now if you sell the futures and take the profits ( 15000 rupees ) then it means that you have made remarkable profit of 30 % within a month. However, you must have noticed that the stock price had risen only 10 % which normally happens in the stock market. Now let us take the same case but instead of stock price rising by 100 rupees we consider that it has fallen by 100 rupees. As soon as the stock price falls by 100 rupees you can get a call from your stock broker. He may ask for deposition of more money as your loss has reached to 15000 rupees and that means after deducting 10000 rupees from your account you still have to pay 5000 rupees more to pay for the loss. this kind of call is called ' margin call '. If you don't have money to deposit then either you will have to sell the futures lots at a huge loss or even the broker can ( read will ) sell your futures lots. So in this case you will have to bear a huge loss of 30 % in a month. Also it is important to note that when stock prices fluctuate a lot then ' margin money ' is increased. So if in this case you had 60000 ( instead of 50000 ) in your account but ' margin money ' per ' lot ' had increased to 25000 rupees after few days of purchasing then also you would have landed in a similar position. So it better to understand the risks associated with trading in futures before going for it.
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