You will get information about derivatives. What is the derivatives market is common question of all beginners in stock market. Let's see What is a Derivative?
What is a Derivative?
Meaning of derivatives: Future derivative is the product whose value (price) depends in underlying security (assets). Underlying assets are like equity (share/stock), indices (nifty, Jr. Nifty), commodity etc.
Future trading can be done on stocks as well as on Indices like IT index, Auto index, Pharma index etc.
In simple words -
In simple language one future contract is group of stocks (one lot) which has to be bought with certain expiry period and has to be sold (squared off) within that expiry period. Suppose if you buy futures of Wipro of one month expiry then you have to sell it within that one month period.
Derivative products initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two thirds of total transactions in derivative products.
Options
An option is a contract that gives the buyer the right, but not the compulsion, to buy or sell an underlying asset at a specific price on or before a certain date.
Underlying assets are like equity (share/stock), indices (nifty, Jr. Nifty), commodity etc.
Calls and Puts
The two types of options are calls and puts:
A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase before the option expires.
A put gives the holder the right to sell an asset at a certain price within a specific period of time.
Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.
Common derivative contract types
Some of the common variants of derivative contracts are as follows:
- Forwards: A modified contract between two parties, where defrayal takes place on a specific time in the future at today's pre-determined price.
- Futures: Are contracts to buy or sell an asset on or before a future date at a price specified today
- Options: Are contracts that give the owner the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) an asset.
- Warrants: Apart from the commonly used short-dated options which have a maximum maturity period of 1 year, there exists certain long-dated options as well, known as Warrant (finance). These are generally traded over-the-counter.
- Swaps : Are contracts to exchange cash (flows) on or before a specified future date based on the underlying value of currencies/exchange rates, bonds/interest rates, commodities, stocks or other assets.
The use of derivatives also has its benefits:
• Derivatives facilitate the buying and selling of risk, and many financial professionals consider this to have a positive impact on the economic system. Although someone loses money while someone else gains money with a derivative, under normal circumstances, trading in derivatives should not adversely affect the economic system because it is not zero sum in utility.
