When you want some extra returns on your disposable capital [idle money] then you take advantage of investing in equities market. Suppose you are bullish [expectation of price appreciation in the market price of the stock] on the stock of company “A”, which is currently quoting at Rs 280 per share.You expect that within one month the stock price will touch Rs. 330 per share depending on various factors playing role in the market for this respective stock.
Question: What do you do to get benefit from this Bullish expectation for a particular Stock ?
Answer: You buy a particular number of shares of this stock “A” at the current market price i.e Rs. 280.
Result: The Stock price touches Rs 330 in a month’s time just as you expected thus you made a profit of Rs. 50 per share on an investment of Rs 280 per share i.e. a Return of 18% in one month – This is good profit earned from your trade.
Question: Can this trade get any better?
Answer: Definitely Yes.
Question: This is amazing but how & for that what should you do?
Answer: Buy Stock Futures of “A” instead buying the stocks in cash. However one thing has to be kept in mind that in Futures there are fixed “LOTS” of shares which could be purchased. These lots differ for different companies according to the current market value and volatility of the stock. In our example of this stock “A” we will perceive that the Futures contract of stock "A" has a single lot of 500 shares.
Effect: Now comes the benefit of buying Futures contract.On buying the Futures contract, you get the same position in shares of company“A” as would have been in the cash market, but you are required to pay only margin money for the shares you are buying and not the entire amount as otherwise needed in Cash market. For example, if the margin for Stock “A” is 20%, you would have to pay only Rs. 56 per share for that LOT of 500 shares. If “A” goes upto Rs. 330, you will still earn Rs. 50 per share as profit but the best thing is that you will have to commit only Rs. 56*500 shares = Rs. 28000 and not Rs. 280*500 shares which amounts to Rs. 1,40,000 in the cash market for delivery based trade. Now that translates into a fabulous return of 89% in one month on the amount of capital committed. This feature of Future Trading is called LEVERAGE. This is simply amazing. A clear cut 4x profit return as compared to the same trade in cash market.
This is the advantage of ‘leverage’ which Stock Futures Trading provide. By investing a small margin (ranging from 10 to 25%), you can get into the same positions as you would be able to acquire in the cash market. The returns therefore get accordingly multiplied.
Read Part II
Read Part III
Question: What do you do to get benefit from this Bullish expectation for a particular Stock ?
Answer: You buy a particular number of shares of this stock “A” at the current market price i.e Rs. 280.
Result: The Stock price touches Rs 330 in a month’s time just as you expected thus you made a profit of Rs. 50 per share on an investment of Rs 280 per share i.e. a Return of 18% in one month – This is good profit earned from your trade.
Question: Can this trade get any better?
Answer: Definitely Yes.
Question: This is amazing but how & for that what should you do?
Answer: Buy Stock Futures of “A” instead buying the stocks in cash. However one thing has to be kept in mind that in Futures there are fixed “LOTS” of shares which could be purchased. These lots differ for different companies according to the current market value and volatility of the stock. In our example of this stock “A” we will perceive that the Futures contract of stock "A" has a single lot of 500 shares.
Effect: Now comes the benefit of buying Futures contract.On buying the Futures contract, you get the same position in shares of company“A” as would have been in the cash market, but you are required to pay only margin money for the shares you are buying and not the entire amount as otherwise needed in Cash market. For example, if the margin for Stock “A” is 20%, you would have to pay only Rs. 56 per share for that LOT of 500 shares. If “A” goes upto Rs. 330, you will still earn Rs. 50 per share as profit but the best thing is that you will have to commit only Rs. 56*500 shares = Rs. 28000 and not Rs. 280*500 shares which amounts to Rs. 1,40,000 in the cash market for delivery based trade. Now that translates into a fabulous return of 89% in one month on the amount of capital committed. This feature of Future Trading is called LEVERAGE. This is simply amazing. A clear cut 4x profit return as compared to the same trade in cash market.
This is the advantage of ‘leverage’ which Stock Futures Trading provide. By investing a small margin (ranging from 10 to 25%), you can get into the same positions as you would be able to acquire in the cash market. The returns therefore get accordingly multiplied.
Read Part II
Read Part III
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