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What is Derivative Trading?

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.

Types Of Derivative Contracts

Forwards Derivatives

A forward contract refers to a customizable financial agreement between two parties to trade in an underlying asset at a predetermined price for a specified date. It is an over-the-counter product.

Forwards Derivatives

A forward contract refers to a customizable financial agreement between two parties to trade in an underlying asset at a predetermined price for a specified date. It is an over-the-counter product.

Future Derivatives

A futures contract is a derivative financial agreement between two parties. It is similar to a forward contract, as it happens on a regulated trading exchange, not directly between two parties.

Future Derivatives

A futures contract is a derivative financial agreement between two parties. It is similar to a forward contract, as it happens on a regulated trading exchange, not directly between two parties.

Options Derivatives

An option contract is a type of derivative contract through which an investor/trader only gets the right to trade at a predetermined price before or on a specified future period, where they will not get any obligation.

Options Derivatives

An option contract is a type of derivative contract through which an investor/trader only gets the right to trade at a predetermined price before or on a specified future period, where they will not get any obligation.

Swaps Derivatives

 A swap contract allows swapping one security between two parties as per a prearranged formula for a future date. You can deal with risk factors, be it related to volatile interest rates or currency exchange rates.

Swaps Derivatives

 A swap contract allows swapping one security between two parties as per a prearranged formula for a future date. You can deal with risk factors, be it related to volatile interest rates or currency exchange rates.

How To Open A Derivative Trading Account

  • Step 1

    Fill the form to request a broker/sub-broker for trading financial instruments. 
  • Step
    2

    Provide your details and select F&O Segment
  • Step
    3

    Submit photo ID proof, address proof, and financial proof.
  • Step
    4

    Upload your digital signature to authenticate your identity.
  • Step 5

    After the verification process, your trading account will be activated.

What Are The Prerequisites For Derivative Trading ?

Before you step into the world of derivative trading it is essential to know a few things. A Demat account allows you to buy and hold financial instruments electronically and safely. Every investor will have a unique Demat account. A Trading account allows you to conduct trades. Your identification in the market will depend upon the account number. This is the reason your trade looks unique in the market. You need to link your Demat account with your trading account to receive shares to your Demat account. Margin maintenance You need to maintain a minimum margin amount in your account so that you do not receive margin calls. You should have a lot of knowledge. If you have adequate knowledge on derivatives, you will be able to trade in derivatives effectively. It’s important to know prior as to how to deal with the associated risk factors in the derivatives you are about to trade to ensure significant returns.

How To Trade In Derivative Trading

  • Step 1

    Along with the ‘Client Registration Form’, fill up  open an account form and complete your (KYC). 
  • Step
    2

    Once your account gets activated, make sure your brokerage account has sufficient balance.
  • Step
    3

    Before you head into any derivative trading, you must understand which derivative you are about to trade into.
  • Step
    4

    There might be a significant amount of risk associated with derivative trading. So you need to work on a derivative trading strategy to ensure significant returns despite associated risk factors. 
  • Step 5

    You can start buying or selling  derivative contracts that you want.

What Are Futures ?

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.

What Are Options?

Option trading is buying and selling of stocks at a specified price at a specified date.Here the buyer has the flexibility to also not buy the security at a predetermined price and date.  Options can also help in making better profits as here you do not pay the full amount of the shares that you are purchasing. It can further even restrict your losses if the share price falls. This is also called hedging. Options are of two types : call and put. A call option allows you to buy, while a put option allows you to sell an underlying stock at a predetermined price throughout the liquid life of a contract. Call and put can be used for : 

Leverage : While you trade in options , it helps you gain from changes in the share price without you paying the full amount  of the share, which means you also get control of the shares without buying them right away. 

Hedging : This is generally used to protect one self from the volatility i.e. fluctuations in the share price. This lets you buy and sell the share at a pre-fixed rate for a stipulated period of time. You can also protect yourself from market volatility by doing proper financial planning. To know its importance, here’s what you need to do . The seller of the option contract is the option writer . Few important  terms you need to know about option contracts are Strike Price , Strike Price intervals , Lot size ,Expiration Date ,Open interest ,Premium.

Awards & Recognition

Benefits Of Margin Trading

PORTFOLIO DIVERSIFICATION

It helps spread your portfolio to different investments so that your profit doesn’t depend upon one investment for all of your profits.

SINGLE WINDOW FOR TRADING

Trade in various derivatives in India’s main stock exchanges such as NSE and BSE through a single window.

MAKE BETTER DECISIONS

Get regular reports on the derivative market to help your decision making on derivative trading.

IMPROVE INVESTMENT POSITIONS

Get research advice, and experts help to improve your investment positions.

LEVERAGE INVESTMENT STRATEGY

Leverage in derivative trading is an investment strategy to achieve higher investment profits.

RISK MANAGEMENT

Get help to manage single stock ownership, event, or credit risk to avoid losses and get a significant reward ratio.

Frequently Asked Questions

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.

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