How Are The Profits Worked Out?

The profits and losses of a futures contract depend on the daily movements of the market for that contract and are calculated on a daily basis. For example, say the price for Reliance in the futures market increases to Rs.2070/- per share the day after Mr. X and you enter into the futures contract of Rs.2040/- per share. Mr. X, as the holder of the short position, has lost Rs.30/- per share because the price just increased from the price at which he is obliged to sell his shares of Reliance. You, as the holder of the long position, have profited by Rs.30/- per share because the price you are obliged to pay is less than what the rest of the market is obliged to pay in the future for Reliance. On the day the change occurs, Mr. X's account is debited Rs.3000/- (Rs.30 per share X 100 shares) and your account is credited by Rs.3000/- (Rs.30 per share X 100 shares). As the market moves every day, these kinds of adjustments are made accordingly. Unlike the stock market, futures positions are settled on a daily basis, which means that gains and losses from a day's trading are deducted or credited to a person's account each day.

In the stock market, the capital gains or losses from movements in price aren't realized until the investor decides to sell the stock. As the accounts of the parties in futures contracts are adjusted every day, most transactions in the futures market are settled in cash, and the actual physical shares/commodity is bought or sold in the cash market in other countries, but in India, that too, is settled in cash. Prices in the cash and futures market tend to move parallel to one another, and when a futures contract expires, the prices merge into one price. So on the date either party decides to close out their futures position, the contract will be settled. If the contract was closed out at Rs.2200/- per share, Mr. X would lose Rs.16000/- on the futures contract and you would have made Rs.16000/- on the contract on an investment of only Rs.40800/- (20% of the amount of 100 shares @ Rs.2040/-).