Derivatives. That single word made many young students drop maths as a subject in favour of a totally different educational path. Luckily, derivatives are not limited to the world of mathematics alone. There is a whole financial market that involves trading in derivatives. Remember, this has nothing to do with maths (well, not much anyway).
A derivative is a financial contract that derives its value from an underlying asset. This could be stocks, commodities, exchange rates or currencies. Through derivative trading, you can take a measured bet on the future value of an underlying asset. Here are a few steps to guide you in your journey in derivatives.
1) Understand how derivatives work
It is often said that knowledge is power. To add to it, knowledge is money too. Trading in derivatives offers great potential for investors to make money. But this is possible only if you are equipped with sound knowledge of how the market functions. Also, be updated with market events. For example, if you are interested in futures trading in the commodities segment, you should keep track of how the prices of metals, oil and other commodities are changing in India and international markets.
2) Find a broker
You can trade in futures and options through most online brokerages in the market. If you are already trading in stocks, you can get started on your derivatives trading at the same place. If you are a beginner, you need to find a good brokerage firm and open a trading account. Select a broker who offers dedicated support and competitive commission rates.
3) Identify where you wish to trade
Alright, you want to trade in derivatives. But which category are you interested in? There is a huge market open right in front of you. Agriculture, crude oil and metals are some of the categories available in commodities alone. You can also trade in the stock market, forex market and indices. Identify which category interests you to begin trading.
4) Create a trading plan
Once you identify a category, you need to do some research to get a better idea about the market. If you already have knowledge about a particular sector, you can start there. For example, if you work in the mining industry, derivative trading in the metals sector is a good idea. After this, you need to create a trading plan to guide you along on your investment journey. Make a list of contracts, time periods and investment goals in a journal. It is quite common for investors to make investment decisions based on emotions once their money is on the line. Instead, what you need is rational thinking. And for this, a trading plan is important.
5) Set up stop loss and profit targets
When trading in derivatives, it is always recommended to create a stop loss and profit target. The market can be unpredictable. For example, stock prices may be rising for a certain period of time but all of a sudden, the prices could drop without warning due to some macroeconomic effect. That’s why, even when you are doing well in the market, it is better to create a profit target and exit when you reach the target. Similarly, when the market moves in the opposite direction, good traders identify when to exit the trade and accept losses. By staying in the trade and waiting, you only risk losing a larger sum of money as time passes.
6) Keep track of your position
Your work does not end once you enter into a futures or options contract. You need to keep track of your positions. A single derivatives trade can go on over a period of months. For instance, you may enter a call option to buy a stock at a particular price (say, Rs 50) in the next six months. To go through with the trade, the stock price should be lower or equal to what you expected. If the stock price goes beyond Rs 50, you don’t need to complete the trade. And for that, you need to be aware of how the stock moves regularly. Keep a record of market movements and adjust your positions in a suitable manner.
To sum up
Investing in derivatives is not very hard. Anyone can trade in derivatives but to consistently earn good returns is a different matter altogether. You need to know your risk appetite and investment goals and invest accordingly. These steps can help you begin your journey into derivatives. Over time, you can gain more experience and identify your own investment system.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Currency Trading in India
Currency Trading in IndiaIndia is ranked high in the list of fast growing economies in the world. The robust and stable financial environment in India makes it an ideal place for international businesses to carry out their operations with good profitability. Moreover, India is among the top countries of the world that attracts foreign direct investment. This makes India a very exciting place for carrying out currency trading as there are buyers and sellers of the Indian currency from across the globe. In this article, we will learn everything about currency trading and its related concepts.Basic Concept of Currency TradingForeign currency is often known a Forex Trading. You can indulge in currency trading in India through various Indian exchanges like NSE, BSE and MSEI. The RBI guidelines suggest that every Indian individual and financial institution can indulge in forex trading via currency pairs. The different types of currency pairs include EURINR, GBPINR, USDINR and JYPINR. You can trade in any of the currency pairs through a broker who has a membership of any of the Indian Exchange.As you are now aware of the basic concept of currency trading, let us learn the meaning of currency trading.What is Currency Trading?When individual, corporate, banks or financial institutions engage themselves in the act of buying or selling international currencies it is known as currency trading. The aim of this trading is to take the benefit of the fluctuations in the exchange rates of the various currencies. It is similar to equity trading where you can buy or sell the currency pair according to the expected price movements. Let us now learn about the common terms that are used while currency trading.Currency Trading BasicsIf you start trading in the currency, there are certain terms that you must be aware of. Below are the terms with their meaning that every currency trader must know.• Future PriceFuture price is the rate at which future contract trade in the futures market. • Cycle of ContractSEBI recognizes 12 outstanding contracts at any point in time in a year. The contract can be for one month, two months or up to 12 expiry cycle. • Expiry DateThe working future contracts expire on a specific date i.e. prior to two working days from the last business day of the contract month. Two days prior to the final settlement date or value date, shall be the last day of the trading contract. • Spread (tick)Difference between bid and ask price is called spread (tick). In case of currency futures market minimum spread is 0.0025 which fourth part of one paise. • Settlement DateThe last business day of the month is the final settlement date of every contract. • Size of ContractThe contract size of the contract is as follows; JPY/INR it is JPY 100,000; EUR/INR it is EUR 1000; GBP/INR it is GBP 1000 and in case of USD/INR it is USD 1000. • BasisWhen the future price is deducted from the spot price it is termed as a basis. In the future market, the price is more than the spot price. Basis is positive in the normal market. • Initial MarginWhen you trade in currency for the first time through future contracts, you must deposit a margin amount with the broker known as initial margin. • Cost of CarryThe future price and spot price relationship can be termed as the cost of carry. The rate of interest is the carry cost in the derivatives market. The cost of carry measures the storage cost after adding interest paid to finance or carry the asset delivery minus the income earned on the asset. • Marking to MarketDepending upon the closing price in the future’s market, the account of the investor is adjusted according to the profit or loss. This adjustment is known as marking to market.After learning the basic terms related to currency trading in India, let us learn about the meaning of long and short positions.Meaning of Short and Long PositionsShort and long positions are two positions that a trader can take in the futures currency market. When the trader expects the currency price to fall in the futures market, he takes a short position by selling it. When the price declines, the trader covers his positions by purchasing from the market at a lower price. Similarly, when the trader expects the price of the currency to rise in the futures market, he takes a long position by purchasing from the market. On the price rise, the trader sells the long currency contract and books the profit. Such fluctuating prices helps the trader to trade and book profits. As the foreign currency is traded in pairs, the trader can take a short position in one currency and go long in another currency depending on the expected future price movement. Currency has always been an important tool for hedging and arbitraging. In this section of the article, we will learn about both the terms and its significance in currency trading.Currency as Hedging ToolCurrency is used as a hedging tool by firms and individuals to cover themselves against the potential risk of adverse events resulting in fluctuations of exchange rates. Hedging is important especially for exporters and importers who receive and make payments in foreign currencies. Any adverse fluctuation in the currency can impact their profitability. Therefore, currency hedging protects investors who are exposed to currency fluctuations and eliminate the losses that may happen. Hedging is done by entering into a forward agreement with the dealers.Currency as Arbitrage Trading ToolMany times there are price discrepancies between different market instruments across different exchanges or trading platforms. Arbitrage takes the benefit of such difference in the prices in the global markets. Like for example, $1 can have a different value in the Indian trading market and Singapore trading market. Arbitrage takes advantage of such price difference and the trader books profit using these opportunities. Arbitrage is one of the safest and risk-free trading practise. Now let us have a look at the factors that affect the pricing in the foreign exchange market.Factors Affecting Foreign Exchange MarketThere are three main economic variables that affect the foreign exchange market in India: Inflation, Interest Rates and GDP numbers. There are many other indicators like trade deficit, unemployment rate, fiscal deficit, etc. that affect the currency market. Sometimes even the news flow has an impact on the prices of the currency market and decide the direction in which the currency price will go.Let us now learn about some of the currency market facts that are essential for every trader to know.Facts about Currency Market The trading of currency futures is possible only on the exchange like Bombay Stock Exchange, National stock exchange, Metropolitan Stock Exchange Limited. The trading hours for currency is from 9 a.m. to 5:00 p.m. from Monday to Friday. For trading in the currency market, there is no requirement to open a demat account. You can simply open a trading account with the broker and trade in the currency market. There are only two segments in the currency market: future and options segments. When it comes to currency trading, it is advisable to seek the services of leading brokers for fast and hassle free trading experience.IndiaNivesh is one of the leading brokers in India offering affordable brokerage rates. Our currency research team provide clients with regular currency trading tips. We also provide online currency trading in India.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Different Types of Derivatives in India
People invest money in the financial market with the hope of making good returns. But the investment may turn risky due to volatility in the prices of securities like commodities, currency, equity, etc. During such fluctuations, all the predictions could go either way. This increases the chances of wiping out your entire investments. Thus, the primary concern of the trader is the risk that is associated with the financial market and flow of returns while trading in the market.There are various instruments available that can protect a trader from the risks and volatility of the financial markets. These instruments not only protect the traders but even guarantees returns to them. Derivatives are such instruments. In fact, you will be surprised to know about just the types of derivatives market that exist. In this article, we will understand the concept and different types of financial derivatives in detail.Before understanding the types of financial derivatives, let us first learn the meaning of derivatives.What are Derivatives?Derivatives are financial contracts that derive their value from an underlying asset. The value of the underlying asset keeps on changing depending on the market conditions. The derivatives can be traded by predicting the future price movement of the underlying asset.The derivatives contracts are widely used to speculate and make good returns. These are used for various purposes like hedging, access to additional assets, etc. Let us now learn about the different types of derivatives market in India.Different Types of Derivatives in IndiaThere are four types of derivatives that can be traded in the Indian stock market. Each type of derivative differs from the other and has different contract conditions, risk factor, etc. The different types of derivatives are as follows:• Forward Contracts• Future Contracts• Options Contracts• Swap ContractsLet us now study the different types of financial derivatives in detail.• Forward ContractsWhen two parties enter into an agreement to buy or sell an underlying asset at a specified date and at an agreed price in the future, it is termed as a forward contract. Forward contracts are an agreement between the parties to sell something on a future date. The forward contracts are customised and have high counterparty risk. Since the contract is customised, the size of the contract depends on the term of the contract. Forward contracts are self-regulated and no collateral is required for the same. The forward contract's settlement is done on the maturity date and hence they must be reversed by the expiry period. • Futures ContractsJust like the forward contract, a futures contract is an agreement to buy or sell an underlying instrument at a specified price on a future date. In the futures contract, the buyer and seller are not required to meet each other to enter into an agreement. In fact, the agreement between them is done via exchange. Since there is a standardised contract in the futures contract, the counterparty risk is very low. In addition, the clearing house acts as a counterparty to the parties of the contract which further reduces the credit risk. Being a standardised contract, its size is fixed and it is regulated by the stock exchange. Since the future contracts are listed on the stock exchange and being standard in nature, these contracts cannot be modified in any way. To put it in simple words, future contracts have pre-decided format, pre-decided expiry period and pre-decided size. In future contracts, initial margin is required as collateral and settlement is done on a daily basis. • Option ContractsOptions contracts are the third type of derivatives contract. Options contracts are very different from futures and forwards contracts as there is no compulsion to discharge the contract on a certain date. Options contracts are those contracts that give the right but not the obligation to buy or sell an underlying asset. There are two types of options: call and put. In the call option, the buyer has the right to buy an underlying asset at a price determined while entering the contract. While in the put option, the buyer has the right but not the obligation to sell an underlying asset at a price determined while entering the contract. In both the contracts the buyer has the option to settle the contracts on or before the expiry period. Therefore anyone trading in the options contract has the option of taking any of the 4 positions i.e. long or short in either the put option or the call option. Options are traded at over the counter market and at the stock exchange. • Swap ContractsOut of the various types of derivatives contracts, swap contracts are the most complicated. Swap contracts are private agreements between two parties. The parties to the contract agree to exchange their cash flow in the future as per a predetermined formula. The underlying security under swap contracts is interest rate or currency. Since both interest rate and currency are volatile in nature, it makes swap contracts risky. Swap contracts protect the parties from various risks. These contracts are not traded on the exchanges and investment bankers are the middlemen to these contracts.To conclude, derivatives contracts like forwards, futures and options are one of the best hedging instruments. The traders can predict future price movements and make good profits out of them. For further assistance regarding derivatives contracts trading, you can contact IndiaNivesh who can assist you with trading in derivatives.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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