A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, index or security. Common underlying instruments include: bonds, commodities, currencies, interest rates, market indexes and stocks.
If you believe in Indian equity story, derivatives are a great way to make the best out of it. The Indian share market has given an average annual return of about 18 percent in the last 10 years.
Any investor who would have invested regularly in Indian equities in the past decade would have realized similar returns. Derivatives give you an avenue to boost your returns from equities by providing leverage through products like futures and options.
Through DP TradeKING, you can now trade in Index and Stock futures on the National Stock Exchange (NSE). Futures trading allows you to enter into a contract (having a maximum period of 3 months), and take buy/sell positions in Index or Stocks.
Trading in futures is not as complex as it sounds. If, during the contract period, the price moves in your favour (i.e. rises in case you have a buy position or falls in case you have a sell position), you make a healthy profit, and vice versa. Today, only a few stocks that meet the liquidity and volume criteria are qualified for futures trading.
The process of futures trading has become simpler with two smart tools offered by DP TradeKING—‘Calculate Index’ and ‘Know your Margin’—that helps in calculating your margin requirements and also the Index and Stock price movements.
An option is a contract between two parties (the seller and the buyer) that gives the buyer the right to buy or sell shares at a specific price, on or before a particular date. There is no obligation on the buyer to complete the transaction if the price is not favourable to him. For this, the buyer has to pay to the seller some money called premium.
To carry out a transaction (buy/sell) position on Index/Stock options, one has to pay certain percentage of the order value as margin. There are two types of options: Call and Put. The former allows the trader to buy the underlying asset at a certain price, while the latter allows him to sell it at a certain price.