These are meant to facilitate the transfer of a component of price risk or risks from operators who do not want to carry it (hedgers) to the operators who intentionally take it ( speculators).
Essentially, futures products allow you to leverage the use of your funds. In simple terms, this means that the amount of money you have to pay to buy a share is much higher compared with the amount you have to pay to buy the same amount of stock futures.
If you purchased 700 equity shares of Grasim at Rs 600 per share, then your total cash outgo would be Rs 4,20,000 plus transaction costs like brokerage, service tax among others.
Instead, if you purchased the same shares as Grasim stock futures in a lot size of one contract at a price of Rs 605 then you would have to pay an initial margin which varies typically between 15 per cent to 25 per cent.
Thus your total cash outflow for a stock future would be 4,23,500. If the margin is say 20 per cent then you only have to pay Rs 84,700.
You can see the huge difference in amount of funds deployed. In one scenario you have paid Rs 4,20,000 and in the other you have paid Rs 84,700 for basically the same purchase.
The additional Rs 5 that you pay for the Grasim future is known as cost of carry, which is linked to the prevailing interest rates and also to the demand supply in the market on whether the stock will go up or down.
Speculation using these products is dangerous for the uninitiated. You must have an appetite for risk and nerves of steel.
