Trading and investment are activities that are popular with retail investors in India, now, more than ever before. Trading in stocks occurs when markets are up and down, and savvy investors know that there is money to be made in trading. Since a while now, futures and options trading has caught on too. People have got some idea of the difference between futures and options, as well as the pros that these derivative contracts offer. Trading in Indian futures and options is not much different than trading in these contracts in other markets. All you need to do is familiarise yourself with some nuances of this way to trade.
Derivatives, or futures and options, are basically contracts made between parties who are willing to purchase or sell any underlying asset at a predetermined price and a set time. These stipulations in contracts are effective as tools to manage risk. In futures and options trading, the risk rests with investors who are ready to take it. Futures and options contracts are instruments to hedge and decrease risk, thereby giving opportunities to make gains during market volatility. When prices are fixed, even if prices in regular markets fall, the price to buy and sell stands as it is mandated by the futures or options contract. Nonetheless, this may sound like an effective way to make easy profits, but contracts may compel you to undertake transactions at lower prices when markets rise. Anyway, it’s worth knowing the main difference between futures and options before you start trading in India.
Although the dual derivatives contracts of futures and options may share aspects in common, they are different. It's true that both derive a value from the underlying asset they represent, which could be commodities, shares, stock market indices, and others. Furthermore, both are representative of a trade made in the future with an agreement made in the present. However, a futures contract permits an investor to purchase or sell underlying assets at a fixed price at a set date. This is not an option for the investor, but an obligation and the transaction has to be carried out without fail. In options contracts, the investor must also agree to sell or buy an underlying asset, but there is no obligation to carry out the transaction. If you think you would be at more risk trading in either of these and just settle for an upcoming IPO in the stock market, you should not turn away before you know more.
Futures and options themselves are not investment products, but are modes to invest in underlying assets they derive their value from. Hence, futures and options (or F & O as they are commonly referred to), come within the category of derivatives. You should know that you do not need to open a demat account to trade in futures and options contracts. The favoured route is to have a brokerage account. In India, you are permitted to trade in derivative contracts at the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The National Stock Exchange permits investors to trade in above a hundred securities, plus nine main indices in futures and options contracts. Futures is a derivative that has more leverage, so it tends to be traded more.
Futures and options in share market trading in India sees a trader make some typical transactions whereby traders can only pay the difference between the contract price which has been agreed on and the market price. This is the reason that traders do not have to make any payment for the underlying assets themselves. Generally, the maximum duration of contracts in derivatives lasts for three months.
Futures and options are worth trying if you are good at speculating about prices of assets, or wish to hedge risk. As you do not have to open a demat account, it's easy to gain some extra knowledge and take the aid of a good brokerage like Motilal Oswal. While you sign up with a broker, you may also think of investing in any upcoming IPO for balancing your portfolio.
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