Can you give me an example of how the leveraged aspects of a future - ProProfs Discuss

Can you give me an example of how the leveraged aspects of a future contract would work?

Asked by Isabellar, Last updated: May 14, 2024

John Smith

John Smith

To buy or sell a gold futures contract currently costs approximately us\$2,360. Each contract controls 100 troy ounces of gold. gold is currently trading at a price of us \$585 per ounce. Consider that it only costs you \$2,360 to control gold worth \$58,500 (\$585 per ounce x 1 contract x 100 ounces = \$58,500). If you bought one gold contract and paid \$2,360, and the price of gold increased from \$585 to \$595 per ounce, you would have a profit of \$1,000 (your contract value increased from \$58,500 to \$59,500). But note in this example that the price of gold increased in value by only 1.7%, yet your investment return was more than 43% (\$1,000 / \$2,360 = 0.43 or 43%)!

What happens if you invest the same \$2,360 in stock that sells for \$23.60 per share? It would cost you \$2,360 to buy 100 shares of that stock. If the price of the stock increased by 1.7%, your shares would now be worth \$24. If you sold your shares, your profit would be \$40. Your profit in percentage terms would be 1.7%. Leverage in the context of that paragraph refers to how much of an asset you can control with your investment. the greater the leverage, the smaller amount of money it takes to control the asset in relation to the value of that asset. The high amount of leverage in buying or selling futures contracts means that even small movements in the asset prices affect your investment in a large way.