Everything You Need to Know About Derivatives Trading
Investing in the stock markets is the best hope of enhancing one’s wealth. If you’ve tinkered around in the share markets or tried your hand at investing, you’ve most likely come across the term “derivatives”. In simple terms a derivative is a financial instrument whose value depends upon the characteristics and value of an underlying asset such as a commodity, bond, equity or currency. Since the time the derivatives were introduced in the year 2000, its popularity among the Indian investors.
Why invest in derivatives?
Derivatives are a good alternative to trade if you want to trade outside of the traditional stocks and bonds. Derivatives allow you to make profits by betting on the future value of the underlying assets. Derivatives prove to be exceedingly beneficial because they help you to make additional profits by accurately guessing the future price as well as act as a buffer in case of losses while trading. They typically pay off over a period of time based on the performance of assets, interest rates, exchange rates, or indices. Apart from stock markets, derivatives can also be traded in the money market and foreign exchange.
What are the types of derivatives?
Derivatives can be classified into two broad categories: futures and options. An option derivative gives the buyer the right to buy (or sell) a certain asset at a specific price at any time during the life of the contract. A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date.
How derivatives trading works?
Derivatives trading involves a simple buying and selling process. The only difference being payment of a marginal sum as opposed to the entire amount. For instance, if you want to buy 100 contracts of Nifty 50 October futures with a value of 5000, with the margin of 5%, you do not have to pay the entire Rs 5, 00,000, but only Rs 25,000.
How to start investing in derivatives?
Derivative instruments can be availed through registered trading members of stock exchanges such as brokerage firms. If you are a first time investor, you need to fill up a KYC (Know Your Client) Form. After the form is processed, you will be allotted with a client identification number proceeding which you need to deposit cash to initiate trade.
