Derivatives' have no independent value. It's value is derived from some other asset, which is called the “underlying asset” and it is contract between two or more traders.
This underlying asset can be an index, stock, commodities bullion or currency. For example, a derivative of ITC share will derive its value from the share price (current value) of ITC.
4 Reasons to Trade in Derivatives
- 1. Hedging: It acts as a good hedging tool against price volatility
- 2. Enhances Trading Limits: High exposure on a stock or security by paying a small margin
- 3. Potential Return: There is a possibility to make money in different market conditions
- 4. Time Leverage: It gives a time leverage of up to 3 months as against 1-3 days offered in other margin products
If the stocks are priced at Rs 10 lakhs and you have only Rs 2 lakhs in hand, this product will still help you take a position in the derivatives market.
Derivatives Market can be classified into Futures and Options.
A future is a contract to buy or sell specific quantities of an instrument at a specified price and a specified time in the future.
In case of an "Option", as the name suggests, there is no obligation to complete the transaction.
Click here to know more on Futures and Options