To know what derivatives are and how they performing well in the Indian market, you need to understand some key points about derivatives.
What are the derivatives in the share market?
Derivatives in the share market are financial instruments that majorly include futures and Options. The value of the derivatives can be derived from different variables, for example, the variable like the price of the underlying assets.
These underlying assets could be currencies or foreign exchange, different commodities like food-grains, different types of bonds, gold, silver or other precious metals, shares, treasury bills, etc.
Derivatives themselves do not have any value or worth but the value of derivatives is derived from the claims given to the owners. If you wish to understand what derivatives are in simple terms, then here is an example for you.
Example : Chips are derivatives of potatoes, and Ghee is derivative of Milk. Both of them have to rely on the supply of their respective raw materials and supply chain.
So, let us understand some key points about derivatives.
Financial Derivatives in India
There are several instruments to invest your hard-earned money but no other instruments like Financial Derivatives. Investing in Financial Derivatives in India gives protection against the risk of losing the investment.
The market never stays the same and the investors often search for risk-free investment instruments like Financial Instruments in India. Financial instruments provide more guarantees than other investment instruments.
There are different types of Financial Derivatives in India to invest in like Options contracts, Future contracts, Swap Contracts, and Forward Contracts.
Growth of Financial Derivatives in India
The potential for the growth of Financial Derivatives in India is tremendous. Financial derivatives were first introduced in the Indian market in 2000. Since that day the investors have seen nothing but the growth of Financial Derivatives in India in great numbers.
Financial Derivatives have been popular ever since they were introduced compared to other investment instruments. In 2008 alone the value of the NSE derivative market was INR
130,90,477.75 Cr. as compared to the NSE Cash market which was just INR 3,551,038 Cr.
Financial derivatives have a greater number of contracts traded compared to previous years. But experts have always felt that the growth of Financial Derivatives in India has still a long way to go.
Stock Market Derivatives in India
Trading in stock market derivatives in India is just like the cash segment. The strategy in stock market derivatives in India would be different as you first need to enter into a sell transaction.
You need to maintain a requisite amount till the trade is settled in stock market derivatives in India. That means you cannot withdraw when the trade is not settled. To trade financial derivatives you are required to consider selecting the stocks with contracts with what amount you have at hand. Then you will need to consider the margin requirements, the price of underlying assets, and contracts.
To trade in stock market derivatives in India, you need to pay a small amount for buying the contract and wait for the contract to be scheduled for expiry.
Growth of Derivative Market in India
The growth of derivatives in the share market in India depends upon several factors. Globalization has led the markets to become one. The advanced technology has led to a better network and connectivity with real-time stock updates and suggestions.
Although there is good demand for derivatives in the Indian market, the stock market demands amendments of tax laws as they stand in the way of the growth of the derivatives market in India.
Earlier the speculative and non-speculative markets were treated as equal. But later the reforms. The reforms were helpful to other financial assets and not towards the derivative market. The financial derivatives. The banks were also limited to trade in the derivatives market because The Banking Regulation Act of 1949 prohibited doing trade in the derivatives market in the Indian economy.
So, derivatives in the share market offer the best way to reduce the risk and provide a guarantee with a fixed price. A fixed price in today's highly volatile stock market. Despite having great benefits, you should look out for the factors like interest rates, and the holding cost of the underlying assets. Also when the after the time of expiry the amount will change.
Derivatives having no value of their face great risk in the market. The liquidity of derivatives in the market is also affected because of uncontrollable demand factors and also supply factors. Even if the price of the underlying asset is looked after, such factors affect these leveraged instruments quickly resulting in losses, too.
After all, to achieve the financial goals, the investors can find derivatives as simpler and more effective.