What are Derivatives?
Derivative trading in India was introduced in the year 2000 and has since then gained immense popularity among traders and investors. Under derivatives trading, investors’ place bets on the future price of an asset like a stock, bond, commodity, market indices, or currency. Derivatives are contracts that facilitate this trading. These contracts derive their value from the asset on which the investor places a bet.
The value of these assets typically fluctuates with the changes in market conditions. Investors use this change to earn profits by speculation. Derivates are essentially contracts of the future. Investors enter into contracts or futures to buy an asset at a later date and time for a fixed price. For instance, if an individual trades in a commodity that costs Rs. 1,000 today, its value could be increased or decreased a month or two from now. This constant change in the value of assets aids investors to earn their profits.
Derivative contracts can be either obligatory or non-obligatory. In some contracts, the parties involved are obliged to trade at the future date at the fixed price. In others, the buyers are under no obligation.
Trade in Derivatives
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What is derivative market?
A derivatives market is a dedicated financial market where underlying assets are traded. The market comprises of four participants:
Hedgers : Individual that invests in the market with the intention to reduce the risk of future price movements is called hedgers.
Arbitrageurs : Arbitrageurs are people who earn profits from the difference in the price of a financial instrument like a stock or bond. Sometimes the price of these instruments can differ in derivatives and cask markets. Arbitrageurs cash in on such opportunities.
Speculators : Speculators are the opposite of hedgers when it comes to risk. While hedgers look for ways to reduce risk, speculators are always on the lookout for higher risks and thereby profits.
Margin traders : These individuals participate in margin trading and only pay a margin of the total value while borrowing the rest from the broker.
What are the different types of Derivatives contracts?
There are four types of contracts in Derivatives trading.
Futures: Just like the name suggests, futures let investors trade in derivatives at a future date at a pre-fixed price. Future contracts are an obligation for the parties involved.
Options: These contracts allow the buyer to buy or sell an asset for a particular price during a specified period. This price is also known as the strike price. Unlike futures, buyers are not under any obligation here.
Forwards: These are available over the market and not traded on stock exchanges. Just like futures, individuals are not under any obligation.
Swaps: This is a private contract that allows individuals to change their fixed interest rate to a floating interest rate or change the cash flow from uncertain to certain.
How to trade in Derivatives market?
Here are some steps one must follow before beginning their journey of derivative trading in India:
Open a Demat and Trading account with reliable broker.Since the derivatives market functions quite differently from the stock market, it is necessary to research and study well. It is also essential to have a sound understanding of derivatives trading.
Investors need to deposit a certain amount of funds known as margin, before they start trading. These funds cannot be accessed until the trade is complete.
Individuals can also choose to trade on over the counter or exchange. While the former is a private contract, the latter is a standardized exchange.
Why invest with Religare Broking?
While derivatives offer many benefits as listed above, it is crucial to embark on this journey with the help of a professional. Religare Broking provides individuals with the right support and assistance to invest in the derivates market. With Religare Broking investors can:
Buy or sell in futures on NSE and trade positions in stock and index.
Pick between aggressive and passive investing, based on their unique needs.
Get high exposure with little capital and brokerage.
Trade on the go on a laptop, tablet, or even a phone.
Use the Smart Portfolio Tracker to keep a check on investments and their performance.
Our Research
Religare Broking has a pool of useful research material that can help investors make the right decisions at the right time. With weekly newsletters, detailed reports, recommendations, etc., on derivates, investors can take advantage of many profit earning opportunities.
Religare Broking also provides real-time assistance over weekly calls with research teams to discuss the happenings of the market affected by the various global events. Religare Broking’s research offers tailor-made aid to ensure that investors are able to meet their goals.
What are the benefits of Derivatives Trading?
Here are some benefits of derivatives trading.
Liquidity
Because of high leverage, derivates trading also presents a high scope of liquidity.
Leverage
The margins required for trading in derivates in significantly low, so that investors can benefit from more exposure.
Better Returns
Derivates trading offers better chances of return regardless of the movements of the market.
Hedging
This allows investors to protect themselves against probable risk and price fluctuations.
Frequently Asked Questions
Derivatives trading is when an investor agrees to trade an asset at a certain price in the future.
Three organizations regulate derivatives in India. These are the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and Forward Markets Commission (FMC).
Options, futures and other derivatives like swaps and forwards, are contracts used to trade in derivates. Options allow buyers to trade in assets for a fixed price for a given period. Futures, on the other hand, are an obligation to buy or sell an asset for a specified price at a future date.
The last day of the contract is known as the expiration day. Futures and options typically expire on the last Thursday of the month when the contract is supposed to end. In case of a trading holiday, the expiration day is preponed to the previous trading day.
Hedgers, margin traders, speculators, and arbitrageurs participate in derivative trading in India.