In the stock markets, futures and options refer to the major stock derivatives for trading. These are essentially contracts that investors buy to trade stocks or any other underlying assets. The contract stipulates that the asset has to be traded in (bought or sold) by a specific date at a preset price. Contracts such as those that futures and options represent aim to hedge risks in the markets by locking the price in, in advance. Before you try out this mode of investing, employing futures trading strategies, you should understand what futures and options trading entails in India.
In the realm of the share market, futures and options derive values from any underlying asset they represent. The assets could very well be stock market indices, shares, ETFs (exchange traded funds), commodities, to name some. The F & O share market is limited to the extent that only shares of prescribed companies on a list regulated by SEBI (the Securities and Exchange Board of India) can be included in F & O contracts. Furthermore, with futures and options trading, you do not have to open a demat account, just a broking account. Investors believe that futures and options trades can reduce some risk while trading stocks. However, since the market momentum cannot be predicted with perfect accuracy, trading may result in profits as well as losses. However, if you are a well-versed investor, you can make the most of trading F & O.
There are futures trading strategies that can be applied when you trade with F & O. However, before you try to apply any of these, with futures or options, you should know how futures and options work in the first place. Futures and options contracts differ from each other with respect to the actions that investors may take according to the terms of the contract.
In a futures contract, investors enter into an agreement to buy or sell shares at a price on a stipulated date. The contract has to be executed on the date stipulated no matter what share price fluctuations occur. Here, the investor has an obligation to execute the trade. In an options contract, an investor can buy or sell shares at a predetermined date, but is not obligated to do so. The investor may choose to take advantage of price hikes and sell before the expiry date (in the case of stocks), or can opt out of the trade entirely if prices do not match expectations. At this point, you may think there is a catch involved in both kinds of trades, and instead opt for an upcoming IPO investment instead. However, take a moment to understand more about futures and options.
You may be wondering why people opt for a futures contract at all, since options, on the face of it, appear to be a better bet. Well, in futures contracts, you are not required to make a total investment upfront. You only have to pay a percentage of the value of your investment, and pay the broker the rest when the transaction is made. So this works on a margin. In terms of options contracts in the F & O share market, although you pay nothing while you sign a contract, related to purchase of your shares, you have to pay a premium to your broker for the transaction, which is passed on to the exchange. This premium must be paid, regardless of whether transactions are finally executed.
However you choose to invest your capital, investment is a must. You may open a demat account and invest in direct equity or any upcoming IPO, or allocate your wealth to futures and options contracts. F & O is suitably matched with investors who are speculators, hedgers and arbitrageurs.
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