If you have a sum Rs 10 lakh, then with that you can only make few specific investments in a specific manner. But derivatives like Options, Futures and Forwards give an opportunity to transact in shares in a different manner than normal. There is another advantage of using derivatives, by using derivatives future expectations can be built into the investment strategy for maximizing profitably. Suppose a person is sure that in next one month price of a stock is sure to go up, then he can use derivatives like options, futures or forwards to maximize the profitability.
Hence, due to these restrictions there is a requirement for change. This has resulted in people looking at other forms of investment and one of them is – Derivatives.
What are derivatives: Options, Futures and Forwards?
Derivatives are investment instruments (like shares, mutual funds, bonds, deposits) whose value is related to the price of some other asset. This means that the change in the underlying asset will result in a change in the price of the derivative contract. It is very important to know in detail about the derivatives contract before a lay investor can invest through derivative route. Generally common investors follow a more common route of investment instruments like shares, mutual funds, real estate etc.
Derivatives are not just related to stock market
One of the biggest misconceptions related to the derivative market is derivatives are related to the stock market only. But the truth is that the derivatives market is quite widespread and stock market is only one of the routes (most popular).
Derivatives like Options and Futures are used in commodities market as well. Commodity market is another popular alternative of stock market investments. Derivative investment is gaining fast popularity in India. In this topic we will discuss how an investor can actually go around investing their money thorough derivative route in commodities.
Investment through derivatives route is more trading (like gambling) than investing. Every trade in the derivatives needs two parties; one who would be for and other would be against an even likely to happen in times to come. It is like betting on a stocks possibility to go-up or go-down in times to come.
What is the need of derivative in the world of investment?
There is great deal of diversity in the market; this diversity generates the need for derivatives. But before investing through derivative route (Futures and options) one has to answer themselves that why they want to go via derivative route instead of normally investing through mutual funds, bonds etc. This is an important step to be taken and hence requires attention.
Derivatives enable you to multiply the utilization of your funds.
One of the biggest benefits of using derivatives is that suppose you had Rs 100,000 in your hand with which you can buy a certain amount of traditional investments say mutual funds. But with derivatives the same fund Rs 100,000 can be used multiple times for trading. In financial term we can say, you will be able to take a larger position in the markets even with the same amount of funds of Rs 100,000. Obviously larger position with same amount of fund results in higher returns than traditionally possible.
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