What is meant by derivatives contracts and how to trade in it ?
Posted by Epicram on September 15th, 2017
Derivatives are financial contracts whose value is derived by underlying asset where asset can be anything like stocks, commodities, bonds, currencies.These contracts enables to earn good profit by betting in right direction on future value of underlying assets. Hedgers, speculators, margin traders, arbitrageurs are the different participants here. These participant prefers to use financial advisory services to be on the safer side and minimize risk level. Derivatives can be traded over the counter or on an exchange. Trading on exchange has a benefit that traders do not have to face there counter party risk.
Following are the types of derivatives contracts:
1) Forward contract
Forward contracts represents an agreement between a buyer and a seller who agrees to buy/sell a particular security on a pre decided date and price. There is no role of exchange here and traders may face counter party risk because of absence of regulatory body.
2) Future contract
Future contracts are standardized forward contracts as these contracts are traded over exchange. Here there is no counter party risk and both the parties are under obligation to fulfill the requirements of contracts as stated.
3) Options contract
Options contracts are similar to future and forward contracts with one key difference that here both the parties are not under any obligations. Call option and put option are its two major types.
Following are the guidelines using which trader can trade in different derivatives contracts:
1) Perform quality research work at your own end. Get familiar with different terminologies used in futures market. Understand the fact that strategies used here are different. For example if you are expecting that in future price of some stock will rise then you will enter in its buy transaction in-case of stock market but here you will have to enter in sell transaction of that stock.
2) Identify margin amount which is required to be maintained and arrange it, as you can not withdraw that amount from your trading account at any point until the trade is settled.
3) Make sure your present trading account can be used to trade in derivatives, if not then consult your broker.
4) Understand your risk bearing capability and then identify in which derivative contract you want to enter. Make decision wisely which fits your budget as well.
5) You can wait until expiry date once you enter in contract to settle trade. You have two options once you take your positions either pay the outstanding amount or take opposite position in market to trade.
Primary aim of traders and investors here is to hedge against future price risk.Traders can manage their risk and returns in a better way by considering mcx tips with precise levels. Derivatives trading can be profitable only when a trader is fully aware of different risks like counter party, underlying asset, price and expiration associated with it and knows how to deal with them.
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