Derivatives

Derivatives are financial contracts that derive their value from an underlying asset. These could be indices, stocks, currencies, commodities, rate of interest or the exchange rates. These financial avenues assist you in making profits by speculating on the future value of the underlying asset.

So, if you intend invest in derivatives, we at AxisDirect will help you with the best of the research ideas. We provide ideas based on analysis from award winning research house to enable you make investments in derivatives simpler. So, whether you are a new investor or a knowledgeable investor, we endeavor to provide you the best derivative ideas to help you create wealth.

There are numerous benefits of trading in derivatives

Arbitrage:

While dealing in the derivatives market, you are basically betting on the future increase or decline in stock prices. As a result, many stock traders use the segment to enhance their profits. This is called arbitrage.

Hedging:

Derivatives trading is most commonly used tool for hedging against price volatility. As part of this, you buy in the cash segment and agree to sell in the derivatives market or vice versa. Thus, you are essentially safeguarding yourself from potential losses. Hedging is mainly used by importers and exporters in the currency derivatives segment.

Margin trade:

When you trade in the derivatives market, you only pay a margin. This is because the actual value of the contracts is too large, usually in lakhs and crores. However, when you make a profit, the percentage of growth is also exponentially higher. This allows you to generate more wealth.

Longer horizon:

You can hold a position up to 3 months when you trade in derivatives.

The Basics of Futures:

Futures are contracts to buy/sell pre-defined quantities of an instrument at a specified price and time. Future contracts come with standardised conditions such as price, quantity and time. The obligation to buy or sell in the future lies with the owner of the contract. Price of a futures contract is determined by supply and demand factors in the secondary market. Index futures were the financial derivative launched in India. Futures contracts expire on last Thursday of the expiry month.

 

The Basics of Options:

If you invest in options, you have the right to buy or sell the contract at a pre-defined price. The purchaser of an option has to pay a premium whenever he/she purchases a contract. The seller of an options contract is obliged to sell/buy an asset if the buyer exercises his contract.

Trading in derivatives is similar to trading in the cash segment of the stock markets.

Step 1:

As a first step, do a thorough research. This step is more important for the derivatives market. However, remember that investing strategies would differ from that of strategies applied in the stock market investing. For example, if you wish to buy stocks that are likely to rise in the future, you conduct a buy transaction. However, in the derivatives market, this would require you to enter into a sell transaction.

Step 2:

Arrange for the requisite margin amount and constantly maintain your margin amount as per the stock market rules. This means you cannot withdraw this amount from your trading account at any point in time until the trade is settled. Also, remember that the margin amount changes as the price of the underlying stock rises or falls. So, always keep some extra money in your account.

Step 3:

Conduct the transaction through your trading account. For that, you must ensure that your account allows you to trade in derivatives. If not, consult us and get the required services activated. Once you do so, you will be able to place an order online or on a call with us.

Step 4:

Select your stocks and their contracts on the basis of the amount you have in hand, the margin requirements, the price of the underlying shares as per the stock market, as well as the price of the contracts. Yes, you do have to pay a small amount to buy the contract. Ensure all this fits within your budget.

You can wait until the contract is scheduled to expire to settle the trade. In such a case, you can pay the whole outstanding amount, or you can enter into an opposing trade. For example, if you placed a ‘buy trade’ for Infosys futures at Rs 3,000, you can place a ‘sell trade’ future contract to exit the trade before expiry. If this amount is higher than Rs 3,000, you book profits. If not, you will make losses.

Click here to understand how to place an order in option, Options Trading.

There are three key requirements for trading in derivatives: 

Demat Account

Your demat account stores your securities in an electronic format. A demat account is unique to every investor and trader.

Trading account

The trading account is used to conduct trades. The account number is considered as your identity in the markets, thus making the trade unique to you. It is linked to your demat account to ensure that your shares directly go to your demat account.

Margin maintenance

 This pre-requisite is unique to derivatives trading. While many in the cash segment also use margins to conduct trade, this is predominantly used in the derivatives segment.