Published : February 6, 2021
It was in the year 2000 when the derivatives market was introduced in India. Since the day of its introduction, the Indian Derivatives market is gaining great significance among Indian traders and its counterparts abroad.
Just like shares, derivatives are also traded in stock exchanges. The popularity of the derivatives market can be gauged by the daily turnover in the derivatives segment on the exchange. The daily turnover in the derivatives market is much higher than the turnover in the cash segment on the exchange.
Before finding out the pros and cons of derivatives trading, let us recall what derivatives are.
A derivative is a contract or a product that derives its value from an underlying asset. The underlying assets deriving the value of these financial contracts include stocks, commodities, bonds, currencies, exchange rates, or even the rate of interest.
In the derivatives market, the traders earn profit by speculating on the price of the underlying assets. The buyers and sellers of the derivatives contracts have opposite estimations of the future trading price of the contract. Both, the buyers and the sellers bet on the future price of the underlying asset to make a profit from derivatives trading.
The different types of derivatives available for traders to trade include futures, options, swaps, and forwards. While the participants of the derivatives market include hedgers, traders, speculators, arbitrageurs, and margin traders.
Though derivatives trading is gaining traction at a fast pace among traders, derivatives trading should be carried out with caution as there is an element of risk involved. Just as a coin, derivatives trading comes with its own sets of pros and cons.
Here are some of the pros and cons which you should be aware of before becoming a derivatives market participant.
Following are the advantages offered by derivatives trading to its participants:
Apart from offering advantages, derivatives market trading comes with certain disadvantages as well. Following are the consequences of derivatives trading:
Almost every asset traded in the financial market comes with its own set of pros and cons and derivatives are no exception. Trading in derivatives requires a lot of knowledge and experience. Therefore investors need to conduct thorough research regarding the process and formulate effective strategies to minimize losses and optimize profits.
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