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A derivative is an investment, contract, or financial asset that derives its value from the price of another asset. Read here to know more about derivatives and their types.
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You may have often heard of the term ‘derivatives’ if you are familiar with equity trading. Several seasoned investors leverage derivatives to their advantage for better risk-return trade-offs. Here is all you want to know about derivatives. Meaning of Derivatives Derivatives are financial contracts that derive their value from underlying assets such as stocks, commodities, currencies, bonds, and market indices. This value is subject to change based on market conditions.
Benefits of Derivatives As you know, volatility and market fluctuations are common in the stock market. There is a risk of losing money. Derivatives can cushion you against this loss. Hence, most investors use derivatives to transfer risk or speculate and make money. They allow you to buy assets from the market at a lower price or sell at a higher price than the prevailing market price. They give you a right or obligation to buy or sell the asset at the prefixed price on or before a specified date on the contract. Derivatives also give you an arbitrage advantage. It means that you can buy an asset at a lower price in one market and sell it at a higher price in another market. If you are an amateur investor and want to understand the advantages of derivatives in detail, you may consider consulting stock brokers in Mumbai.
Types of Derivatives There are four types of derivatives: 1. Futures It is an agreement in which you can buy or sell an asset at a future date at a predetermined price. Both parties the buyer and seller are under obligation to fulfill the contract. Futures are traded on the stock exchange. 2. Options In the options, the buyer of the contract has the right but no obligation to buy or sell the asset at the prefixed price. There are two types of options: • The ‘call’ option gives the buyer the right to buy the asset at a strike price on the prefixed price. • The ‘put’ option gives the buyer the right to sell the asset at a predetermined price on a specific date.
3. Forwards Forwards are customized contracts in which both parties enter into a contract to trade an asset based on their assumptions of price movements. However, forwards are not traded in stock exchanges because they are unstandardized and available over the counter. 4. Swaps Swaps are derivatives in which both parties exchange their financial obligations. It allows cash flow exchange between them. Like forwards, swaps are also not traded in stock exchanges and are available over the counter. You can start your journey in derivatives with the help of Ajmera x-change, the best commodity broker in India. Our brokers and mutual fund advisors will offer sound and practical advice to manage your money through derivatives in the stock market. Get in touch to book a consultation session.
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