How nice it would be to buy or sell stocks, currency, and commodities at any date in the future at a price that is set today! Well, you can! This is the basic premise that futures and options trading operates on. F & O trading has turned out to be a lucrative channel for many investors. You may have heard it being referred to as derivative trading. With a reasonable degree of prediction of future prices of different assets, futures and options may work wonders for investors. However, if you want to start learning about the basics of how F & O trading functions, and several of its related features, this is a good place to start.
About F & O Trading
Futures and options trading is conducted by means of contracts, either to buy underlying assets (as mentioned in the contracts), or sell underlying assets. However, investors agree to either purchase or sell a predefined quantity of assets at a predetermined date in the future, and at a fixed price. The trading part refers to the actual transactions of buying or selling assets. Therefore, you could say that the types of F & O trading consist of futures and options. For trading in futures and options, although the underlying asset may be stocks, you do not have to open a demat account. Nonetheless, you need a trading account with a broker.
F & O Trading - Types
You can trade in futures and options, with great F & O tips for tomorrow, but only after you have grasped the definitions of these two kinds of trading. Trading in futures and options, or derivatives, has two major components - futures and options. They resemble each other in that they are both contracts to trade assets at a pre-fixed amount and date. However, the aspect that sets them apart are the conditions and terms of the contracts they represent.
- Trading in Futures - Once any investor enters a futures contract, they have the right to purchase and sell underlying assets by a predefined date. Once a futures contract is agreed upon, investors have the obligation to carry it through at any cost, at the date specified, and the pre-fixed price. A futures contract involves a right and an obligation on the part of investors. The contract has to be carried out irrespective of any price movements, positive or negative. The futures contract is, therefore, binding.
- Trading in Options - Futures and options trading lets you fix a price of the assets you want to buy or sell beforehand. In an options contract, there is more flexibility involved. Once an investor enters an options contract, they have the right to purchase and sell assets as a preset price on a pre-fixed date, but the contract isn’t a binding one. There is no obligation on the investor’s part to carry it through. In fact, investors may choose to buy and sell shares before the expiration date of the contract.
Think you want to opt out of futures and options and go in for an upcoming IPO instead? Wait till you read about the features of F & O trading.
Features of Futures and Options Trading
Below, you can find some salient features of F & O trading and hints as to why this is a good investment option:
- Both futures and options are listed on major exchanges, enabling investors to trade in them with a simple trading account. With F & O tips for tomorrow that many reputed brokers can offer you, your trading is seamless.
- It is possible to trade in futures and options with commodities, stocks, currency, indices, and other kinds of securities.
- Derivatives trading lets you begin your trading activity without initially buying any assets.
- Any F & O contract’s value depends on the underlying asset’s value. This is decided based on existing market value and expected price shifts in markets.
- You can trade in derivatives only with stocks that are listed for futures and options trading by the Securities and Exchange Board of India (SEBI).
- In futures contracts, there is a margin that you have to pay for in advance, to buy the contract. This is a percentage of the value of the contract.
- In options trading, you have to pay your broker a premium while entering a contract. This is a charge levied by underwriters of options contracts and takes care of their expenses if contracts are not transacted on.
F & O Trading - Pros and Cons
You should know both sides of every story in the investing world, and futures and contracts have advantages and disadvantages you should be aware of:
In a futures contract, you can buy a contract by paying a percentage of the contract's value which is only a fraction. You can also leverage your position by purchasing many futures contracts, and only pay the margin money to invest.
- In case the market shifts in your predicted direction, you stand to make substantial profits.
- Options contracts offer investors flexibility in which only a small sum (the premium) is lost if you opt out of the contract.
- By trading in derivatives, you can get arbitrage opportunities due to the fact that you bet on fluctuations in price.
- F & O trading acts as a hedge and is used by many investors this way. With F & O tips for tomorrow, it's easy to trade in F & O.
- In case the markets do not move as investors have predicted, acute losses may be incurred, and this is truer for futures than options.
- Investors need a grasp of the markets and how they work for derivatives trading to be fruitful. Insights into the markets and technical know-how is a must to trade in F & O. Amateurs are likely to lack this, and should indulge in F & O trading with the help of a financial advisor.
Trading with Flair
If you have a high risk tolerance, futures may be good for you. Moreover, you need a keen sense of the markets for any trading to bear you yields. You may not have to open a demat account for F & O trading, but you will need to sign up with a good broker for a trading account. If you are still apprehensive about trying F & O trading, you can indulge in investment with any good upcoming IPO.
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