An Insight on Derivative Market in India


Derivative markets deal with trading of financial contracts that derive their value from some underlying assets, hence this market is also known as underlying market. They include stocks, indices, commodities, etc. These derive their value by predicting and betting on the future value of an asset. One can trade in derivative like Futures based on the Stock Futures Tips from expert advisers.
This market is highly volatile since the value of the asset keeps on changing every now and then. These changes can lead to either high loss or large profit depending on the position taken by the trader. There are mainly two types of standardized contracts in the derivative market. One is futures and the other is options. The third type of market is contract for difference market (CDM).
                                              
Ø   Futures segment of derivatives is a market where a buyer and seller make an agreement to trade a particular contract on a specified date with a fixed price in future. The trader needs to pay a margin amount for the same. The margin amount is a small percentage of the total value of the underlying asset. This market is very useful for those traders who presently do not have enough funds but in future will have enough money to trade. In futures a trader cannot choose to decline the contract even if he is in loss position, since the trade was predetermined.

Ø  “Options”​is a market where one can choose to decline the contract of he finds that he is in loss position. In this market the trader is needed to pay premium which is non refundable. The trade is predetermined, but the trader does not have any obligation to trade. The premium basically acts as an amount paid to get oneself free from obligation. The predetermined price is known as strike price. Options are further classified in two categories and they are call​and put.

Ø  “Call”​gives the right but not the obligation to buyer to buy a particular stock or indices at a preset price during the life of the contract.

Ø    Put​Option offers the buyer the right but not the obligation to sell the stock at a preset price on a predetermined date in future. As far as process of trade is concerned derivatives can be classified into two types. One is over the counter trade derivatives and the other is exchange traded derivatives.

Ø    Over the counter ​contracts are traded between two parties directly without any interference from exchange or any other intermediary. Swaps, forward rate agreements and exotic options are some of the examples of over the counter trade of derivatives.

Ø   As far as exchange ​trades are concerned, this type of trading is done by specialized exchanges. Derivative exchanges acts as an intermediary body to regulate trade between the two bodies. Participants in the derivative markets can be classified into four categories and they are hedgers, speculators, margin traders and arbitrageurs.

Ø   Speculators are the keen observers who speculate whether the price of an underlying asset will rise or fall in future and accordingly trade to make maximum profit.

Ø     Arbitrageurs try to take out risk-less profit by taking long and short position in same or
different contracts at the same time.

Ø     Hedgers are the least risk takers who always try to protect a position or anticipated position in
the market. They seek to take a position opposite to the risk. One can take the benefit from the
derivative market by trading on the basis of Stock Option Tips and Stock Futures Tips.

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