Wednesday, February 20, 2008

The Dark Future

I sometimes wonder how is it possible for people to incur a great loss in shares. Why should someone lose money when the market crashes? Why don't they simply keep the shares and sell it when the market again goes up? The answer to these questions is, there is a dark concept called *Futures* in share market. It could give you in thousands and take back millions. Lets see how it works, again, I am not an expert in share market and what I say here may be wrong, and in that case, please let us know of the correct concept behind it.

As the name *Future* suggests, this concept is about the value of a share in the future. That is you buy only in lot (here lot means groups of shares, for example, Tata Motors has lot of size 412, Sathyam has lot of size 650, Moser Baer has lot of size 800, etc.). But the amount of money that the broker will take will be very less. If for example, if 650 shares of Sathyam cost 2.8 lakhs, you only need to have about 50 thousand. With 50k you can buy a lot worth 2.8l.

If the price of the share increases 2 rupees, you will gain a profit of 1300. You can book the profit and enjoy. On the contrary (actualy, there is no contrary here), if the price goes down by about 10, and if you do not have enough money to back up, you will get a call from the broker asking you to have more money in your demat account. If at the moment, you do not have the money, the broker will simply sell the shares, without even asking you, and will force you to lose 6500.

So many people get bankrupted because of this reason due to crash. They would have invested all their money in (dark) Futures, and, during the crash, if they can not put more money in their account, the broker will sell all the lots and say: 'You now have 0 rupees in your account. Better luck next time'. That is it. You are bankrupted.

Lets see in the next blog about ways to escape from the dark Futures. Share you comments as well as your experience in futures (if you have) here.

1 comment:

Prabakar said...

enna koduma...