Stocks are common and famous enough, but futures and options investments are unique modes to invest in stocks and other assets. In the plainest terms, futures and options represent instruments of a derivative nature which derive value out of the underlying asset they stand for. They are mainly used by investors to hedge investments against any potential market losses. If you want to make investments in futures and options, it's vital you know how they work.
When you talk of futures and options, you are essentially referring to trading instruments, not the securities in actual fact. These instruments fall within the category of derivatives as each of them gets (derives) their intrinsic values from any underlying assets. These assets may take the form of stocks, bonds, commodities or exchange traded funds. Therefore, you are not directly transacting in trading activities with assets (purchasing and selling them on exchanges), but are buying contracts that deal with trading in them. Just as you are required to open a demat account to trade in stocks, in futures and options trading, investors have to enter contracts or agreements. So, futures and options are contracts that are bought by investors to trade in particular assets.
Gradually, as more people are getting the hang of investing in the markets, futures and options have also reached heights of popularity. They are contracts through which buyers and sellers of assets either agree to buy or sell underlying assets at predetermined prices on a fixed date in the future. For a buyer, the agreement is to purchase derivatives at a future fixed date, and for a seller, a sale of derivatives must be made by a set date in the future. Both futures and options are derivatives contracts, but there is a difference. A futures contract gives any investor the right to buy or sell underlying assets, but with an obligation to do so by a certain date. This is regardless of any potential profit or loss that can be made with the transaction. This contract is a binding one. In futures and options trading, an options contract gives the same right to an investor, but there is no obligation to buy or sell involved. The investor may or may not exercise their right in the contract.
If you think that trading in stocks directly or subscribing to an upcoming IPO is easier than this, think again. Futures and options hold many benefits for certain investors.
Once you have understood what futures and options bring to the table of investment, you may have gauged the pros and cons yourself. These derivatives contracts are usually used by speculators well, as they have a knack for deciding on how markets and prices of assets will move. By fixing a price and a date, they can be near-sure not to lose out. Futures and options also provide a hedge against market risks, but you should be completely knowledgeable about the underlying asset in any contract. In case your investment in the markets has just started, you would be better off if you open a demat account and gradually work your way up through the stock markets. Subscribing to an upcoming IPO will also get you clued on to the practice of market instruments and investment.
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