Derivatives
Trading
Derivatives Meaning
Derivatives are the financial securities whose value is derived from the underlying asset/ group of assets, i.e., stocks, bonds, currencies, or commodities.
In derivatives trading, contracts are traded but not the underlying asset. There are four types of Derivatives: Futures, Options, Forward, and Swap.
Participants of Derivatives Trading in India
All types of investors: expert long-term investors or smart short-term investors, derivatives trading is for everyone. Derivatives can be used to hedge portfolios consisting of stocks, indices, or other investments. Derivatives trading in India is cost-effective by engaging in the categories such as Currency and equity to receive significant exposure to the investments. Derivative trading also benefits the sharp movement in prices.
Participants of derivatives trading in India can be categorized under three groups:
Hedgers: Here, the investor invests in financial markets to minimize the price volatility in exchange markets. This is to eliminate the risk of future price movements. Derivatives have become the most popular instruments in the hedging sector because derivatives effectively minimize risk with their fundamental assets.
Speculators: This is the most common market activity in which financial market participants actively participate. However, it is a risky activity in which investors get involved. In this category, participants purchase any financial instrument/asset for which investor/participant speculates to become valuable in the future. Speculation is driven by the motive of earning potentially lucrative returns in the future.
Arbitrageurs: It is the profit-making activity in the finance market that comes into effect by taking a chance or profiting from the market's price volatility. Arbitrageurs participants earn profits from the price difference emerging in investment from the financial securities such as bonds, stocks, derivatives, etc.
Note: We do not advise retail investors to write derivatives contracts since it is a high leverage product and hence very risky
Advantages/Benefits of Derivatives Trading in India
Low/Minimum transaction rates: Derivative contracts are known as a risk management tool. Thus, it helps to reduce market transaction costs.
Risk Management tool: The derivative contract value is directly proportional to the price of its underlying asset. Therefore, derivatives can be used to hedge the risks associated with the price fluctuation levels of the underlying asset.
Determine the value of an underlying asset- Derivatives contracts are helpful to know the value of an underlying asset.
Transferable risk- Derivatives allow investors and others to transfer risk to the other parties.
To know more about how to do derivatives trading and to open a derivatives account, you can contact us on 022- 2858 4545 or write us at customerservice@acm.co.in
Derivatives trading requires a piece of deep knowledge about the products and the group of experts. We at ACMIIL conduct a great amount of research regarding the products and the client investment portfolio. Our experts offer research services on a daily/weekly/monthly basis. ACMIIL is a registered research analyst.
Safety
Markets are highly volatile; hence it is not safe to invest in derivatives unless you are constantly in touch with the price movements. Negligence in not tracking your positions can lead to huge losses.
Liquidity
This is the most liquid class of financial assets. The turnover in the derivatives market in India is almost 15 times + than the cash segment volumes. Hence most of the Derivatives contracts are highly liquid, and you can enter and exit at any point in time and have very competitive prices.
Returns
Returns from Derivatives trading are the same as those of equity markets. However, due to large volatility, you can make big money or lose also.