As a trader, one can choose from a wide range of securities like equities, commodities, currencies, and mutual funds. You might not know about different types of trading as a beginner. However, it is essential to understand how different securities are traded on stock exchanges. Even though you are interested in stock trading, mutual fund investment, or any other scheme, knowing about all financial instruments is essential. Besides enhancing your financial or trading knowledge, you can invest in different securities and build a diverse portfolio. For now, let us discuss derivative trading in detail.
What Exactly are Derivatives?
Derivatives are financial instruments that allow investors to benefit from market movements. They are financial contracts whose value is based on an underlying asset or index. These contracts allow investors to speculate on price movements. Many investors rely on derivatives to hedge their portfolios against inflation. You don’t need a vast amount of capital to invest in derivatives. You can reap high returns from derivatives trading by anticipating the market. Let us discuss different types of contracts to understand derivative trading in its entirety:
- Futures: These contracts allow investors to sell or purchase a given asset on a future date. Also, the quantity of underlying assets is predetermined in futures contracts. They are perfect for hedging or benefiting from future price movements.
- Options: Options contracts also allow investors to call (buy) or put (sell) underlying assets on a given future date. However, investors aren’t forced to buy or sell assets on the given date. On the other hand, futures contracts make it mandatory to buy or sell assets on a given future date.
- Forwards: Forwards are similar to futures contracts. However, forwards are preferred for non-standardised assets, usually traded in over-the-counter markets. Forwards can also be customised by the two parties.
- Binary Options: These are options contracts where investors are allowed to bet on the future price of underlying assets. When investors bet on a price above a predetermined level before the expiration date, they receive a fixed payout.
Besides the aforementioned derivatives, swaps, options on futures, and digital options are also available for investors. Derivatives markets are usually vast, offering tailored contracts for different risk management strategies.
Understanding Derivative Trading Online
Investors can buy or sell derivatives through online or digital investment platforms. You also need a trading or brokerage account to purchase and sell derivatives. A trading account is mandatory in India for buying and selling different financial securities, including derivatives. You can log in to your trading account through an investment platform provided by your broker. Stockbrokers are authorised distributors of trading accounts and investment platforms in India. Do not forget to check for derivatives trading facilities before choosing a stockbroker.
Some people might debate the use of Demat accounts for derivative trading. Demat accounts allow investors in India to store or hold electronic securities. Since derivatives are financial contracts, they aren’t stored in electronic or physical form. You can indulge in derivatives trading without a Demat account in India. Derivatives are usually settled in cash or mark-to-market. However, you must still know how to open Demat account online. You might want to hold other electronic securities besides derivatives in a Demat account.
Pros of Investing in Derivatives in India
Now that you understand how to trade derivatives online, here are the benefits of doing so:
- Derivatives offer leverage, as you can control a large position even with limited trading capital.
- Investors can hedge themselves against rising or declining prices of certain assets. You can protect your portfolio from market volatility, inflation, and other risks.
- The value of derivatives can depend on underlying assets, indexes, and other securities. They are perfect for diversifying your portfolio by having different assets.
- Derivatives allow investors to benefit from both market ups and downs.
- Many investors trade derivatives at frequent intervals. Due to increased trading volume, the liquidity of derivatives is high.
In a Nutshell
Derivative trading can help investors reap high rewards. Brokers in India facilitate derivatives trading at lower transaction or brokerage costs. It is crucial to check out the available derivatives products or types before choosing a broker. Indulge in derivatives trading along with other securities to build a diversified portfolio now! Read more blogs on our website.
