If my list contains over 1 lac elements then how to effectively search a particular element ?
If the element I'm looking happens to be at the last index then it will take lot of time to search.
Also how contains() work here?
If you're just occasionally searching for one item, it won't take long. You can probably do millions of equality tests per second.
However, finding an item in an unsorted list is an O(N) operation, so if you're doing it a lot, it could become a performance issue. In that case, you would want to sort the List with Collections.sort(), and then use Collections.binarySearch() to find it in O(log N) on an ArrayList.
Another alternative, if you won't have duplicate elements, is to use a SortedHashSet.
As for how contains() works, you can read the docs as well as I can. That's all that's specified. Anything else is left up to the implementation. You can look at the source code to see for yourself if you want. It's in src.zip in your JDK download. However, the most likely implementation for a List is to iterate over the List, comparing each element until we find a match or reach the end of the List.