If one thing is certain about commodity and financial markets, it’s changes in price. Prices fluctuate all of the time. They can very well go up, down and all around, responding to several factors. These may include the weather, the state of the economy, agricultural yield, election results, wars and coups and of course, government policies. The list of things that influence price change is virtually endless. With futures and options trading, prices are influenced in similar ways.
Obviously, those investors who deal with these markets are concerned with price changes. This is because fluctuations in prices translate to profit or loss. Investors resort to futures and options trading to keep themselves safe from price changes. Derivatives are contracts that derive value from underlying assets. These assets comprise stocks, currency, commodities, etc.
All About Futures
To know about futures and options trading, you have to first know about futures and options themselves. Let’s talk about futures first. A kind of derivative represents the futures contract. In a futures contract, a buyer or a seller makes an agreement to buy or sell a particular quantity of a specific asset, at a certain price at a fixed future date.
Here is a case in point. Let’s just say you have purchased a futures contract to purchase 200 shares of a certain company at Rs. 100 per share at a certain date. When the contract expires, you will receive the bought shares at Rs 100 each, irrespective of existing prices. Therefore, whether the price of the stock goes up or down, you will get the amount stipulated in the contract at the price fixed. Stocks aren’t the only underlying asset through which futures are offered. You can also get futures contracts for gold, agricultural products, currency, petroleum, etc.
You may open a demat account to invest in stocks with futures contracts, and this brings down your risk considerably. Furthermore, futures prove invaluable in helping you avoid risks associated with volatility.
All About Options
If you want to successfully diversify your portfolio, with stocks and other financial products, yet wish to lessen your risk, futures and options provide a safeguard. You could also think of any upcoming IPO investment. Coming back to futures and options, you should be aware of what options are. An options contract is also an agreement that is made by investors, and a little bit different from a futures contract. Here, the buyer, or the seller, has the right to buy/sell a certain asset at a fixed price on a predetermined date. While the right to buy or sell is given to the investor, there is no obligation involved. Therefore, if the investor changes their mind, the contract may not be upheld.
Types of Futures & Options
Futures contracts have the same terms whether you are a buyer or a seller with regard to a futures contract. However, in the case of options contacts, there are two kinds. The first type is a call option, which is a contract that gives the purchaser a right. The second is the put option that gives the seller the right. Hence, in futures and options trading, where options are concerned, there are two kinds of contracts depending on whether you are a buyer or seller of assets.
Lessen Risk
Several investors still believe in direct stock trading and open a demat account to do so. The unfamiliarity about futures and options contracts leaves many avoiding such kinds of investment routes, but they can keep investors safe from risks of price shifts. Investors are savvy these days, and look for different ways to reduce risk, but some still explore more direct investment routes like any upcoming IPO.
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