The derivative market is known for its volatality, and thus, it has given birth to the demand for automated trading systems. These systems are easy to use and have several advantages over the manual trading systems. The most important benefit that comes from automated trading is the ease with which you can place your trades. You do not have to spend hours or even days sitting in front of your computer screen trying to figure out whether the trade is profitable or not. Another advantage is that these systems offer low commissions, which makes them especially attractive to small investors and day traders.
Derivatives, as the name suggests, derive their value from an underlying asset. Buying and selling derivative contracts in the market is what makes derivative trading. Derivative contracts are short-term financial instruments that have a fixed expiry date. You need to buy them at a particular price - known as the strike price - and sell at another price before the expiry date. The trick lies in predicting if the underlying asset will move up or down within a fixed period, thereby enabling you to make a profit. The risk you take is dependent on how much your overnight margin amount is. Derivatives can be bought for as little as $200 to $500 depending upon the broker you choose.
Types of Derivatives:
Derivative contracts are agreements between two parties to buy and sell the underlying asset at a future date. Derivatives trading can be gained through stock markets and these derivatives’ prices are affected by the change in price of the underlying asset. Doing derivative trading is easy. Derivative contracts are one of the most important financial instruments that are used to hedge and speculate against the future price of a commodity or an asset. In this tutorial, we will learn what derivatives are and how they can be traded with ProfitSource.
Difference between a futures and options contract
So, you think futures are just for commodity traders like pigs or potatoes? Think again. Futures allow you to trade everything from interest rates and foreign currencies, to equity indexes and bonds. There’s a key difference between a futures and an options contract. In the case of options, the buyer or the seller can either choose to exercise their right to buy or sell the underlying asset, or they could let the right lapse upon the expiry of the contract. With a futures contract, both the buyer and the seller are legally obligated to honour the contract upon expiry, and both parties must exercise the contract before expiry. Derivatives may sound a little complicated, but what we’re trying to convey is that they have big potential as an addition to your portfolio. The best part is you can open a brokerage account in minutes so you’re ready to go when market conditions get interesting.
What are the steps for trading in derivatives?
To invest in derivatives, you need to possess an active demat account. You also need to open a trading account in India. If you already don’t possess a trading account, you could get in touch with stockbroking firms like IIFL and apply for a free trading account in India. Once your account is set up, you need to link both the Demat and trading accounts before applying to trade in derivatives.