What are Futures?

Please Note: This article is written in a manner that even a common man can read, understand and put the same into practice in real life. I simplified many concepts and omitted important details, for the ease of comprehension

A futures contract is like staying on rent. One experiences a lifestyle similar to the owner of the property. However, the property goes back to the actual owner at the end of the agreement period (Prefixed) or a new agreement is signed at the end of the term (rollover). Please note we are paying a very small amount compared to the actual value of the property (Underlying).

Similarly, we buy a future contract of stocks by paying a small price and get to enjoy all the advantage and drawback like the owner of the stock. If the stock value goes up by Rs 1 your Investment value goes up 1 multiplied by the number of stock and the same in case the price comes down.

With rented property, we get a lifestyle similar to the owner, with Stock Futures we get returns similar to the owner.

To understand the power of futures let us take an example:

Let us dilute it further:

If the price of the underlying goes up by Rs. 50, Let us assume the purchase price of the stock was Rs 1400/- The below table will clear any doubts left

The story will have a similar effect, in case the price goes down.