Like share trading in the cash segment (buy & sell shares), derivative is another kind of trading instrument. They are special contracts whose value derives from an underlying security.
Futures and Options (F&O) are two types of derivatives available for the trading in India stock markets.
In futures trading, trader takes the buy/sell positions in an index (i.e. NIFTY) or a stock (i.e. Reliance) contract. If, during the course of the contract life, the price moves in traders favor (rises in case you have a buy position or falls in case you have a sell position), trader makes profit. In case the price movement is adverse, trader incurs losses.
Few fundamental things you should know about F&O trading:
- The F&O segment accounts for most trading across stock exchanges in India. They are the most popular trading instruments worldwide.
- To take the buy/sell position on index/stock futures, a trader has to place certain % of order value as margin. Which mean if a trader buy future contract worth of Rs 4 Lakhs, he pays just around 10% cash to broker (known as margin money) which is Rs 40,000. This gives the opportunity to trade more with little cash.
- Profit or losses are calculated every day until the trader sells the contract or it expires.
- Margin money is calculated every day. Which means if the trader doesn't have enough cash (margin money) in his account (on any day when trader is holding the position), he has to deposit the margin money to broker or broker can sell his F&O contract and recover the money.
- Unlike stocks; derivative has an expiry. Which means if trader do not sell until a pre-decided expiry date, the contract is expired and profit or loss is shared with you by the broker.
- Future Trading can be done on the indices (Nifty, Sensex etc). NIFTY Futures are among the most traded futures contracts in India.
