If you know the tricks of share trading, the derivatives market in India must be the next stage in your journey as an investor. Derivatives trading can open you to a new, never-seen-before world of gravity-defying profits at breakneck speeds. While equity trading might be for the conservative investor, derivatives trading is for the lion-hearted. Dive deep to understand the mechanism behind derivatives trading and the types of derivatives market in India.
What Are Derivatives?
Derivatives are instruments that derive their value from underlying assets. The assets may be equity stocks, indices like NIFTY or BANKNIFTY, commodities like gold, crude oil, etc., and currencies. The derivatives market in India is highly leveraged, so the opportunities of making money are typically much higher than traditional share trading.
The most common derivatives trading instruments in India are futures and options. While futures provide you with the right and obligation to buy or sell the underlying asset at a future date, options give you the right, not the obligation, to buy or sell the underlying asset at a future date. You can enter into four types of trades through futures and options in the derivatives market - buy call, buy put, sell call, sell put.
When you buy call, or sell put, it means you expect the price of the underlying asset to increase before the contract execution (read, expiry) date. But, if you buy put or sell call, it means you are certain that the asset's price will tumble soon.
What is the Role of Exchange in the Derivatives Market in India?
Indian stock, commodity, or currency exchanges are authorised by the Securities and Exchange Board of India or SEBI, which works under the Ministry of Finance, Government of India. The exchange provides the interface to conduct derivatives trades. It facilitates convenient and transparent collaboration between buyers and sellers.
There are three types of exchanges providing derivatives trading in India. If you want to trade in equity and index derivatives, you can do so through the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). Similarly, if you want to trade in commodities like crude oil, gold, metals, etc., you can do so through commodity exchanges like the Multi Commodity Exchange (MCX) or the National Commodity and Derivatives Exchange (NCDEX). Conversely, if you want to trade in currencies, NSE-SX or MCX-SX simplifies that. Hence, there are three types of derivatives market in India - equity & index derivatives, commodity derivatives, and currency derivatives.
How Can You Participate in the Derivatives Market in India?
To get started in derivatives trading in India, you need a Demat and trading account. 5paisa offers instant free Demat and trading accounts to investors with PAN and Aadhaar cards. Once your account gets ready, you can load it with the margin required to initiate a derivatives trade.
In the derivatives segment, the margin is usually 10X. Margin gives you the leverage you need to trade efficiently. For example, if the cost of an instrument is INR 1,00,000, you may initiate the trade with INR 10,000. Hence, maintaining the minimum cash required to trade is mandatory.
Derivatives trading is quite popular in India for multiple reasons, including ease of entry and exit, minimum investment, gravity-defying profits, and the like. Remember to research and study before placing the bets, as derivatives are highly volatile.