Maximize tax savings
up to ₹46,800 easily
0% commission • Earn upto 1.5% extra returns
Derivatives are contracts that derive their value from the underlying asset. These are widely used to speculate and make money. Some use them as risk transfer vehicle as well. This article covers the following:
Derivatives are financial contracts whose value is dependent on an underlying asset or group of assets. The commonly used assets are stocks, bonds, currencies, commodities and market indices. The value of the underlying assets keeps changing according to market conditions. The basic principle behind entering into derivative contracts is to earn profits by speculating on the value of the underlying asset in future.
Imagine that the market price of an equity share may go up or down. You may suffer a loss owing to a fall in the stock value. In this situation, you may enter a derivative contract either to make gains by placing an accurate bet. Or simply cushion yourself from the losses in the spot market where the stock is being traded.
Apart from making profits, there are various other reasons behind the use of derivative contracts. Some of them are as follows:
Each type of individual will have an objective to participate in the derivative market. You can divide them into the following categories based on their trading motives:
The four major types of derivative contracts are options, forwards, futures and swaps.