Prashanth
7th January 2009, 09:55 AM
Hello,
Unlike Equities, trading in Derivatives is High Risk - High Gain. If you are new to the markets, no mater what the Broker / Dealer tells you, do not and I repeat DO NOT try your Luck in Derivatives before you are able to understand the markets better.
The risk is higher due to High Leverage that F&O provides. While its theoretically has to be used for hedging purposes, its rarely done so and much of the trading is pure speculation. Just like speculation elsewhere, it entails a higher degree of risk.
There are two main derivative products that can be traded in the Indian Markets. They are Futures & Options.
Futures: Well, Futures are nothing much than leveraged Cash. For example, assume you are interested in Buying 200 shares of Infosys while have money for 100 shares only. One way of buying 200 shares is by buying a Future of Infosys. Margin is generally around 30 - 40% (is higher for a lot of scrips). Hence you can enjoy the profits that can come from buying 200 shares with money for 100 only.
The downside? Well, as the stock falls, you are required to pay up the difference. Hence while a fall of Rs.100 would have resulted in a notional loss of Rs.10,000 if you had purchased 100 shares for delivery, in case of Futures, you will have to pay Rs.20,000.00 just to maintain the position. And payments have to be done by the next day itself since its a T+0 kind of settlement.
Money Management is very crucial to trading in Futures. Unless you have the confidence and knowledge of TA, its better to stick to equities.
Unlike Equities, trading in Derivatives is High Risk - High Gain. If you are new to the markets, no mater what the Broker / Dealer tells you, do not and I repeat DO NOT try your Luck in Derivatives before you are able to understand the markets better.
The risk is higher due to High Leverage that F&O provides. While its theoretically has to be used for hedging purposes, its rarely done so and much of the trading is pure speculation. Just like speculation elsewhere, it entails a higher degree of risk.
There are two main derivative products that can be traded in the Indian Markets. They are Futures & Options.
Futures: Well, Futures are nothing much than leveraged Cash. For example, assume you are interested in Buying 200 shares of Infosys while have money for 100 shares only. One way of buying 200 shares is by buying a Future of Infosys. Margin is generally around 30 - 40% (is higher for a lot of scrips). Hence you can enjoy the profits that can come from buying 200 shares with money for 100 only.
The downside? Well, as the stock falls, you are required to pay up the difference. Hence while a fall of Rs.100 would have resulted in a notional loss of Rs.10,000 if you had purchased 100 shares for delivery, in case of Futures, you will have to pay Rs.20,000.00 just to maintain the position. And payments have to be done by the next day itself since its a T+0 kind of settlement.
Money Management is very crucial to trading in Futures. Unless you have the confidence and knowledge of TA, its better to stick to equities.