Learn about futures and options | Motilal Oswal

About futures and options

Stocks and stock trading can be a good way to build your wealth over the long run. Nonetheless, there are different modes of trading in stocks, and futures and options are gaining momentum as we speak. Essentially, what futures and options are, are derivatives traded in the markets. They are a kind of contract which two parties enter to trade in a specific underlying asset at a fixed price and by a predetermined date. By making the price of the trade specific, futures and options help to safeguard investors in relation to fluctuations in the future. It's important to know the fundamentals of futures and options before you try them. 

Futures and Options - What are they?

By and large, investing in the stock markets is pretty easy to grasp. These days, everyone knows they must open a demat account to invest in equity, and the buying and selling of shares on the stock market is a common phenomenon. In the case of futures and options, you need some detailed understanding, but concepts are easy to comprehend. 

Futures and options are not the investments in themselves, but rather, they are methods to invest in any assets. Through futures and options trading, investors may invest in underlying assets like stocks, commodities, etc. Both options and futures are essentially contracts that are like agreements to buy or to sell specific assets. Therefore, investors can choose futures contracts or options contracts to invest in any underlying asset that is specified in any given contract. Futures and options, thus, derive their respective values from the underlying asset they represent. Both futures and options refer to trades that will take place in the future at a fixed date, and for a set price. 

Main Differences

Trading in futures and options may not be as easy as subscribing to an upcoming IPO. Nonetheless, when you know the key distinction factors between futures contracts and options contracts, you will get a clue as to how they operate. 

  • The Right and the Obligation - Futures contracts represent a promise to trade and be completed at a particular date in the future. Hence, if an investor agrees to buy a fixed amount of shares at a particular date in the future, they are obligated to do so, whether prices fluctuate or not. In an options contract, on the other hand, there is no obligation on the investor’s part. The investor can opt to exercise the agreement or not. 
  • The Date of Trades in Futures and Options - If investors hold futures contracts, they have to mandatorily trade (either purchase or sell) their assets in the contract on the date specified in the contract. In the case of options, investors do not have to adhere to stringent obligations. However, for options trading, there are some nuances about the dates of contracts (which are called dates of expiry). For instance, in options trading to do with indices, these can only be executed on the specific date when the contract expires. However, if the underlying asset is stock, then an options contract holder can execute the contract at any time till the expiry date.

Why invest in F & O?

Futures and options (F & O) trading requires that you should understand certain nuances of markets and the commitment to monitor and track the markets in detail. There is the clear element of speculation, and these contracts are often used most by hedgers and speculators. If you are just beginning your investment in stocks and other securities, why not start with equity and open a demat account first? You can also subscribe to any upcoming IPO to get an initial hang of the markets. 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

 

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