The derivatives market has an increased significance lately. Derivatives came in the year 2000 and since then have grown much popular. This is evident from the fact that the daily turnover in the derivatives segment on the NSE is much higher than the turnover in the cash segment.
Derivatives
A derivative is a financial instrument that does not have a value of its own, but it derives its value from an underlying asset. The underlying asset could be stocks, indices, commodities, currencies, gold, exchange rates, or the rate of interest. The derivatives help you to make gains by betting on the future value of the underlying asset.
Futures contracts, forward contracts, options, swaps, and warrants are some common derivatives.
Derivatives trading
An investor can get benefitted from the rise or fall in the stock’s value, change in the exchange rate of a pair of currencies, fluctuation in indices, change in commodity prices, etc. The investors often make additional profits by forecasting the future price of the asset.
The participants involved in derivative trading include:
- Hedgers
- Speculators
- Margin Traders
- Arbitrageurs
Benefits of derivatives trading
The benefits of derivatives are summarised below:
- Profit on shares lying idle: If you do not want to sell your long-term shares, you can use derivative instruments to take benefit of the price fluctuations in the short term. Derivative trading permits you to do transactions without selling your shares.
- Earn from arbitrage: The derivative traders do arbitrage trading by buying low cost asset in one market and selling the same at a higher price in the other market. You can do the same and take the benefit of the differences in prices in the two markets.
- Protect your assets by hedging: You can protect your assets against the price fluctuations. In the derivatives market, you can hedge yourself against a fall in the price of shares that you have. The derivatives market also offers products that saves you from the price rise of the shares you are interested in buying.
- You can transfer your risk: One of the best uses of derivatives is the transfer of risk. There are some risk-averse investors who use the derivatives to enhance safety, while there are risk-loving investors who deal in risky trades to get better profits. This way, you can transfer the risk.
How to do derivatives trading?
This is how you can start derivatives trading:
- It is important to research a lot. You must be aware that the strategies of dealing in derivative trading are different from the cash market. Like in cash market, you do a ‘buy’ transaction first, but in the derivatives market, you can to do a ‘sell’ transaction first.
- The investor can look for an option chain that lists the options prices of all of the options for a particular index stock.
- Keep the margin amount ready. You must also know that the margin amount changes with the price of the underlying asset.
- Conduct a transaction through your trading account. Only after this, place an order with your broker.
- Make sure you do the transaction based on the amount in hand, margin requirements, the price of the asset or shares, and the price of the contracts.
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