Futures trading involves committing to a contract where you agree to purchase or sell an underlying asset at a pre-agreed price on a specified future date. When you enter into a futures contract, you're required to pay a 'margin', which is a fraction of the contract's full value. This margin system affords you leverage, meaning you can control a substantial position while only committing a relatively small amount of capital.
For instance, let's say you're looking at a futures contract for 100 shares of a company listed on the NSE, with each share priced at ₹500. The total value of the contract would be ₹50,000. Rather than paying this entire sum, you might only need to pay a margin of 10%, which amounts to ₹5,000. Now, if the share price increases to ₹550, the value of the contract rises to ₹55,000. If you decide to settle or close your position, you could potentially make a profit of ₹5,000 (minus transaction costs and any other fees).
Conversely, if the share price drops to ₹450, the value of your futures contract would decrease to ₹45,000, and you would face a loss if you were to settle the contract. Hence, while futures can amplify gains, they can equally magnify losses, making it imperative to approach futures trading with a well-thought-out strategy and an understanding of the risks involved.
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