If you are new to stock trading, you might have understood some of the basics by now. You can buy/sell stocks as per your fundamental and technical analysis to generate profits in the cash market. There is another segment within the stock market known as the derivatives market that is used for speculation, arbitrage, and hedging. The derivatives segment has grown exponentially in India after it was intorduced in 2000. F&O contracts worth a turnover of Rs. 2,365 crores were traded between 2000-01 and F&O contracts worth a turnover of Rs. 30,84,291.70 crores were traded on a single day on Dec 30th 2020 (3,53,83,771 F&O contracts).
Future and options stocks: The F&O segment is a relatively new addition to the Indian Stock Markets. This is something that every beginner should try to learn about. An understanding of this market will help you in the long run as well.
WHAT ARE DERIVATIVES?
Derivatives is a financial security that derives its value from an underlying asset or benchmark. Stocks, currencies, commodities, and bonds are some of the most common underlying securities. Any fluctuations in the price of an underlying benchmark result in a fluctuation in the prices of its derivatives as well.
Welcome to the over the counter (OTC) derivatives segment where you can buy/sell contracts that are not traded on any exchange. These contracts are exchanged between parties and their values are derived from the underlying asset.
WHAT ARE FUTURES?
Futures contracts are long-term contracts that require a party to buy/sell an underlying asset at a set price in the future. Futures contracts can be traded on an exchange, such as the Chicago Mercantile Exchange or traded OTC (over the counter) in which case they are negotiated directly between two parties.
Future contracts are used by traders to lock the price of an underlying asset or security. Every futures contract has an expiration date and a price. For instance, on NSE, the stock future contracts have a monthly validity and expire last Thursday of every month. However, there are I-months, 2-months, and 3-months future contracts available for trading.
Futures Contract is an agreement to buy or sell an underlying asset in the future at a predetermined price. By the expiry date, the contract holder must mandatorily fulfil the contract terms, regardless of whether he is making profits or losses. Traders and investors commonly use the futures contracts for hedging against the price fluctuations of underlying securities and prevent losses.
WHAT ARE OPTIONS?
Options are a type of derivative security that derive their value from an underlying asset or security. Options contracts allow buyers to either buy or sell a basket of shares or stocks at a fixed price by a specific date known as the “expiration” & “maturity” respectively. These contracts are not physical copies of stocks and do not create actual ownership rights over the stocks. Instead, options contracts represent the right but not the obligation to buy/sell stocks by an agreed-upon date, which is known as the expiration date. This right gives the holder influence over how the stock reacts to market forces between now and the option expiration date.
To learn more about future and options stocks click on the link given.
