Derivatives: Investment made easier than ever

Traditionally India has been a country where savings in the form of fixed deposits and recurring deposits are considered a safe option and so the majority of the people invest their hard-earned money in these schemes. Only about 3.7% of people choose to invest in stock markets as they are much riskier though they promise heavy returns. The safe playing mindset of the people and the vast volatility in stocks are the two main reasons for people being away from the market. Though people who regularly invest in the market and are aware of the ways and means understand the full advantages that can be reaped through it. 

In the starting phase of investment, people tend to go with more safe options and guaranteed returns. With the increase in experience and influx of higher returns, people tend to get riskier with their investments. Once the trader is well prepared finally the time of trading in derivatives arrives. 

 A derivative is a financial contract whose value is determined by an underlying asset or a group of assets. It is from there that the benchmark value of the derivative is determined. These assets mainly are currencies, stocks, etc. Trading in derivatives is mainly performed by investors with significant experience. As the risk here is too high and so is the scope for profit/loss. A variety of derivatives type are also present. Some of which are listed below:

• Forwards & Futures: In these types of derivatives the contract obligates the buyer to buy an asset in the near or far future at a pre-agreed price. Though both forwards and futures exhibit similarity in their nature up to a large extent but the point of difference in them can be seen in terms of flexibility. Forwards allow changes in the quantity of the commodity and date of transaction whereas futures don’t allow any changes.
• Options: These types of derivatives provide the buyer with the power of buying and selling an asset in the near or far future at an early agreed price. This is a right but not an obligation though. By exercising this power, the buyer can avoid a sumptuous amount of losses.  This also provides the owner with a certain sense of pride/ownership. 
• Swaps: These kinds of derivatives permit the mutual flow of cash between two parties in the contract. These kinds of derivates have a flow of cash fixed.

Derivative trading:

Derivatives are traded in exchange for other known derivatives in which a particular buyer or seller senses potential. They can also be traded over the counter. Though there is a huge scope of profits, but an equal amount of risk is also present while trading derivatives.

Conclusion:

The facts and details mentioned above clearly exemplify the sheer importance of derivatives in the stock market. There are different types of derivatives available so one can trade according to their choice and convenience, also along with the scope of huge profit-making there is the tremendous risk of facing sumptuous losses associated with it so a trained trader doing trades is more favoured over newbies.

If you want to trade in derivatives, 5paisa is the broker for you