A Definitive Guide on Derivatives Market
What are Derivatives? •
A derivative is a financial contract wherein the investment instrument’s value is derived from an underlying asset or security. An asset or a group of assets are chosen as a benchmark value, from which the derivative’s value is derived.
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Types of Derivatives •
There are four major types of financial derivatives, and you can read all about them below. – – – –
Options Futures Forwards Swaps
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Participants Of Derivatives Market •
Considering the high number of advantages available with derivatives trading, as mentioned above, there are several different participants who enter the derivatives market with their own personal agenda. – – – –
Hedgers Speculators Margin Traders Arbitrageurs
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How To Trade In The Derivatives Market? •
The first thing you are required to do when you start trading in derivatives and its types is that you need to pay a marginal amount, which cannot be withdrawn by you until the contract is executed and the trade has been settled. • If, while trading, your deposit falls below the minimal acceptable amount, you are required to replenish it.
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Online trading •
An online trading account also needs to be created before you can begin trading in different types of derivatives. • However, if you are using the services of a broker for trading in this market, you can place your orders over the phone or even online.
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Financial requirements •
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Before you invest into a particular derivative, make sure to thoroughly understand everything about the underlying asset it is based on. Keep your budget in mind and ensure that it is adequate for meeting the financial requirements of the margin for trading, cash in hand, and prices of the contract and the underlying asset as well.
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ADVANTAGES OF DERIVATIVES
Secure Your Investment •
A derivative contract is the best way to protect yourself against an investment that you could be observing turning sour. • When you trade in derivatives in the stock market, you are essentially placing money on your certainty that a certain stock will either do well or sink
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Protected From Market Volatility •
Investing in derivatives enables you to remain protected from the volatility of the market. • For instance, you can buy stocks in a certain market and then enter a derivatives contract through which you safeguard your investment, even in case you meet with a loss in the market.
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Profit On Sinking Stocks •
As an investor, it is likely that you have invested in stocks that you are confident will perform well. • However, if they aren’t and you are able to accurately gauge this before the rest of the market, you could be able to turn a profit by entering a derivatives contract.
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