Futures and options come under the helm of financial products that investors can easily use to hedge existing investments and make some money. Both futures and options permit investors to purchase investments at specific prices by specific dates. However, the markets that prevail for each of these products are quite distinct in their working, and their risk for any given investors. The difference between futures and options may not be properly understood by investors, and this is the main reason they keep away from these two investment modes. Otherwise, they can be very helpful to new investors and those venturing into different asset classes.
Here is a rough idea before you learn about the details of futures and options.
When an investor goes in for an options contract, it gives an investor a right to buy/sell shares at a specific price during the time that the contract remains in effect. There is no obligation on the part of an investor to either buy or sell. Contrastingly, a futures contract gives an investor the ability to buy or sell shares on a particular date in the future, but here, investors have an obligation to carry out the transaction. For trading in futures and options, an investor need not open a demat account.
Options are largely based on an underlying security’s value, like that of a stock. As mentioned earlier, an options contract lets an investor have the opportunity to buy/sell an asset at a predetermined price range in the time frame of the contract being in effect. However, investors do not have any obligation to carry out transactions if they choose not to. Futures and options in the share market have this as a major point of difference.
Typically, investors have to pay a premium to buy options contracts. This may be a percentage of the underlying asset’s value (usually reflecting 100 shares of any underlying asset). Generally, premiums represent the strike price of an asset - the rate to sell or buy it until the expiry date of the contract. This is the date by which any transactions must be carried out.
Another key point of difference between futures and options is the fact that in options contracts there are types, depending on the purchase or sale of assets. Two kinds of options exist. These are call and put options. A call option represents an offer to purchase an asset, a stock, when it reaches the strike price as long as the contract has not expired. A put option is basically an offer to sell an asset, a stock, at a particular price.
In terms of futures contracts, they are relatively simple to understand and do not have as many related aspects as options have. In a futures contract, investors are obligated to carry out transactions of purchase or sale of assets at a stipulated price on a certain pre-fixed date. These represent a true hedge in investments, and you can clearly understand them in terms of commodities, such as oil. Buyers may wish to lock in prices if they think prices will shoot up in the future.
Now that you have understood the difference between futures and options to a decent degree, you can try your hand at trading. You do not need to open a demat account, just a brokerage account. Futures and options are a great way to start your investment journey, and while you are exploring pathways of investment, try any new upcoming IPO too.
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