When you clearly understand that futures and options are really tools which investors use to trade in the marketplace, you may get a grip on why they may be profitable. Financial contracts that derive value from any underlying assets are known as futures and options derivatives. Therefore, as financial contracts that take place with a buyer and a seller of an underlying asset, they are called futures and options derivatives of stock trading. The idea behind derivatives trading is to form a hedge against risks and gain significant earnings due to volatile prices by nominal margins payments. When you want to execute such trading in terms of contracts to purchase or sell, you need a trading account, a derivatives trading account. You can open a trading account with any good brokerage firm, like Motilal Oswal, for example, and this may be linked to a free Demat account. You may not need to have a Demat account for futures and options trading as contracts are valid merely up to the date of their expiry. So, although there are underlying assets involved, these are being bought and sold according to the terms of a contract. An online trading account suffices to deal in futures and options.

An F & O trading account is a required aspect of trading in futures and options. Here are some of the main reasons why:

• No Direct Trading

  Direct trading in the derivatives market cannot take place. If you are an investor, you need to register yourself with a listed brokerage, like Motilal Oswal, who is seasoned to make these trades officially. Brokerages like Motilal Oswal are trading and clearing members of the National Stock Exchange F & O market and the Bombay Stock Exchange derivatives sector.

• Equity Trading Account

  For any trading that an investor conducts, typically online trading, an equity trading account is a fundamental requirement. Without this, you cannot make trading contracts with F & O.

• A Hedge

  When the underlying asset class faces substantial volatility, you need a derivatives trading account to act as a hedge.

• Nominal Margins

  With nominal margins, with the aid of a derivatives trading account, you can afford calculated risks in the trading of futures.

• Holding On Longer

  If you have a trading account, you are able to hold a position for a long time, if you need to, up to 3 months.

• Great Benefits

  When you trade in futures and options with a trading account, brokerages give you advantages of easy access to your account online, a pan-India presence to trading in different markets, regular updates of trades, expert advice, etc.

Although futures and options are essentially derivatives of underlying asset classes, they are not alike. The primary difference is that an option represents a right (NOT an obligation) to purchase/sell any underlying asset, at a predetermined price. On the other hand, a futures contract is an obligation on the buyer’s and seller’s part, to execute trades at pre decided prices on a date that is mutually agreed upon. In an example of a futures trading contract, for instance, you may buy a month of equity contracts of a certain company through a futures contract at Rs. 500 a share. When the contract expires, the share price may be at Rs. 550 a share. You wind up making a gainful profit.

An equity trading account or a derivatives trading account is necessary to indulge in F & O trading. Your trading becomes a hassle-free process as you can carry out trades from anywhere with online trading accounts. This is a clear benefit to investors, but trading in F & O offers investors more pros than cons, and these main ones are expressed below:

• Instruments with Leverage:

  In order to trade in futures, investors must place a margin - this is a fraction of the value of the contract, usually 10%. This acts as collateral that investors keep safe with brokers or exchanges, just in case markets move in directions opposing the positions investors have taken.

• Liquid Markets:

  Trading in futures offers investors liquidity to a high degree. This is because future contracts trading occurs in large numbers. Furthermore, there is almost a constant presence of sellers and buyers in futures markets, ensuring dynamic and quick placement of orders.

• Extended Trading Hours:

  In futures and options derivative trading, markets stay open for business beyond traditional hours. This gives investors more leeway and freedom to trade without time limits.

• Low Costs:

  On the placement of futures trades, commissions are kept low, and can go as low as 0.5% (of the value of the contract) brokerage commission. This, of course, depends on the degree of the service of any given broker, and you get the best in service standards from Motilal Oswal.

• Hedging and Diversification:

  Vital vehicles for the purpose of hedging and managing any potential risk, futures contracts give investors safer ways to invest. For instance, companies that engage in F & O contracts make use of futures to control risks related to foreign exchange and interest rates risks. They lock in interest rates by anticipating a drop in interest if a sizable investment is made. Futures, therefore, aid in increasing the efficiency of underlying markets - they decrease any unexpected costs of buying any asset.

Now that you have understood F & O trading to some degree, you may want to explore this very lucrative channel of investment further. You can do this by visiting the Motilal Oswal website, or better still, download the MO Investor app that gives you all the knowledge you need. This is a one-stop brokerage to manage your investments online with the click of a switch. Moreover, you can open an equity trading account online and start off right away. Before this, however, check out the advantages you get by transacting with Motilal Oswal:

• Efficient Online Trading Platform:

  Motilal Oswal gives you trading platforms that make your life very easy. With a website that has a user-friendly interface, no task is too hard to navigate.

• Seamless Online Processes:

  You can either use the MO Investor app or trade on the MO website. Either way, you get the benefit of opening accounts smoothly, with minimum documentation and steps that are quick.

• Dedicated Help:

  In case you need any kind of help while trading or opening accounts online, Motilal Oswal offers you services of help through any process. You also get a team of financial advisors to hone your trading skills and recommend the best F & O contracts to trade in at any given time.

• Research Reports:

  F & O trading requires constant market research to know about underlying assets and price shifts. With Motilal Oswal’s assistance, investors can keep a constant eye on the market, as MO has experts that determine market trends and engage in continuous analysis.

• Unbeatable Experience:

  Motilal Oswal makes it simple for you to trade in futures and options as the firm has years of experience in the field. The 22,00,000 plus happy customers, 100 plus awards and rated 4-star apps are testament to this.

• Low Costs:

  One of the few brokerage firms that offers investors low commissions and many perks while trading. Furthermore, you get to trade across exchanges and exposure to the best trades is maximal.