Know what are derivatives in trading and how to do derivatives trading in India

Derivatives are often confused with stocks, but they are not the same thing at all. Stocks represent ownership of a company and their value goes up or down depending on how well it does financially. Derivatives, on the other hand, don't represent any kind of ownership and they have no intrinsic value, they only have an extrinsic value which depends on what they're derived from.

Derivative trading is a type of trade that is based on the value of an underlying asset. A derivative can be used to hedge against a decline in the value of the underlying asset or to speculate on its value. In this article, we are going to learn about what is derivatives trading in India, and how to start derivative trading. 

This article covers: 

• What is derivative trading?
• Types of derivatives
• What is the margin money in derivative trading?
• How to start derivatives trading in India? 

What is derivative trading?

Derivative trading is the buying and selling of stocks, bonds, commodities, currencies, or other assets to earn profit from the change in their price. The trader agrees to buy or sell a security at a future date at a set price. It is a type of trading in which the trader does not buy or sell the underlying asset. Instead, they make a bet on the price movement of that asset. Also, it can be used as a hedge against other investments.

Derivative trading is a type of investment that has been around for centuries and it has been used by many investors to reduce risk. For example, an investor might sell a stock short if they think that the price is going to decrease. This way if the stock does decrease in price they will make money on their investment but if it increases in the price they will lose money on their investment.

Key takeaways: 

• Derivative trading can be done in a variety of ways. The most common are futures, forwards, swaps, options, and swaps.
• Futures are contracts that have the future delivery date and price agreed upon now.
• Derivative trading is a type of trading that is used as a hedge against other investments.

Types of derivatives

1. Options contract

Options contracts are agreements between two parties that give the buyer the right, but not the obligation, to buy (call option) or sell (put option) a security at a predetermined price and time. If you are considering purchasing an options contract, it is important to understand what these contracts are and what they represent. 

1. Futures contract

A futures contract is an agreement to buy or sell a certain commodity or financial instrument at a predetermined future date. The buyer of a futures contract agrees to pay the seller at a set price on or before the future date, and the seller agrees to sell the commodity or financial instrument to the buyer at that price.

Futures contracts play an important role in the derivatives market, which is the largest and most complex segment of the financial system. Futures contracts can be used to hedge against price volatility in the underlying security or commodity. 

1. Forwards 

Forward in derivatives is a term used to describe a contract between two parties in which one party agrees to pay the other party a certain amount of money, usually at a future date. Forward contracts are often used by traders to reduce risk and lock in profits.

1. Swaps

Swaps are derivative instruments that allow two parties to exchange cash flows or other assets without having to go through the hassle of buying and selling on an open market. Essentially, swaps allow two traders to agree to pay one another a predetermined price for an agreed-upon quantity of a certain asset at a certain point in the future. 

What is the margin money in derivative trading?

Margin is a financial leverage that allows traders to increase the size of their position without incurring additional risk. The idea behind margin trading is that the trader borrows money from a broker to buy an asset on margin. One thing you need to keep in mind is that you have to give collateral usually in the form of a securities portfolio or other assets while using margin.

This allows them to make more profit by taking advantage of rising prices. However, if the market declines and the value of the collateral falls below the purchased asset's value, then the trader could lose all their money. So, investors need to understand how it works and what factors can affect their chances of success.

How to start derivatives trading in India? 

• Open a Demat and trading account from a broker that suits your requirement. 
• Once your Demat account is activated, you need to pay a margin amount that you need to maintain till you execute the contract. 
• You can trade in financial contracts that have an expiry date of 3 months. Make sure to settle the contract before the expiry date.

Conclusion

Derivative trading can be profitable if you correctly predict which assets will move up or down in value. If you trade options, for example, you might gain money if the underlying asset price goes up but lose money if it falls. If you trade futures, you might gain money if the price of the underlying asset goes up but lose money if it falls. However, there are a few things to keep in mind when trading derivatives such as always taking proper risk management to protect your own capital, making sure you fully understand the risks and rewards associated with each derivative before trading it, and never risk more than you can afford to lose.