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Derivative trading is a type of financial contract between two or more parties through an exchange or over-the-counter (OTC). This type of contract allows investors/traders to trade in various assets with their risk factors.
A derivative is a financial instrument whose price depends on an underlying asset or a group of assets like commodities, currencies, stocks, bonds, etc. You can hedge your portfolio in Derivatives trading on stocks or any other securities. You can even take advantage of price fluctuations in this type of trading.
Future is a financial contract between the two parties ( buyer and seller) . It binds both the parties to buy or sell a fixed number of shares at a pre-fixed future date and price. It is mandatory for the buyer and seller to purchase and sell the underlying asset at the pre-decided rate, on the expiration date. Here the buyers and sellers are unknown to one another. Futures contracts are also available on different asset kinds though we mainly look at the most common ones which are stock and index futures.
A few attributes of Futures contract are :
Lot Size : in futures contracts transactions cannot take place in a single share , it has to be as per the lot size predetermined by the exchange in which it is traded; which simply means the number of shares a contract has in a lot .For example Tata Power has a lot size of 6750 shares ( 1 lot = 6750 shares).
Expiry : The maturities are traded in the exchange and expiry date is the last Thursday of each month , in case there is a holiday it expires the very next business day.
Duration : Future contracts are available for 1 month , 2 month and 3 month. One month is also called near month , two month is called middle month and third month is called the far month. The month in which the contract expires is called the contract month.Example: If one wants to buy a single august contract of Tata Power the concerned buyer will have to buy at which the August future contracts are available in the derivative market. So lets say tata power august future contract are at 100 per share which means that you are agreeing to buy or sell at a fixed price of Rs100 per share on the last thursday of august. It is not necessary that the stock price in the cash market will also be 100 , it can be 90 or it can also be 120 which depends on the prevailing market conditions. The difference between the price can often be taken advantage of to make profits.
It helps spread your portfolio to different investments so that your profit doesn’t depend upon one investment for all of your profits.
Trade in various derivatives in India’s main stock exchanges such as NSE and BSE through a single window.
Get regular reports on the derivative market to help your decision making on derivative trading.
Get research advice, and experts help to improve your investment positions.
Leverage in derivative trading is an investment strategy to achieve higher investment profits.
Get help to manage single stock ownership, event, or credit risk to avoid losses and get a significant reward ratio.
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Although the derivatives market began in 2000, it has been emerging phenomenally with its growth in volume and number of trading contracts over the past few years. A derivative contract can be for stock, currency, commodity, or bond. You can perform derivative trading in the National Stock Exchange (NSE) through a derivative trading platform.
The f and o segment allows you to trade in future and options that represent derivatives which are financial instruments with the value depending upon an underlying asset like stocks, currency, or gold of a company.
Futures and Options trading contracts will help you obtain significant returns when you know how to deal with the risk associated with it.