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Does Derivative Market really work for Retail Traders?

In the past 20 years, the importance of the derivatives market has multiplied manifold. It has noticeable in its yearly turnover reaching a monstrous INR 95,47,789 crores in March 2021, an amount enormously more than that clustered in the cash segment. But, what are derivatives to start with?

What are derivatives?

Fiscal contracts that can develop their fundamental value from the fundamental asset are called derivatives. It could be anything right from stocks, exchange rates, bonds, indices, and commodities. A trader makes an estimated bet on the future value of an asset to earn a profit. Its value is derived from that item, and this is why they are called “Derivatives”.

While the price of assets in the stock market rises or falls, leaving an option for an investor to make profits or losses. Derivatives Trading results in one of the two things if you appropriately estimate the future price of an asset, you either earn a profit or have a secure net loss.

Difference between Equity Trading, Commodity Trading and Currency Trading

Can retail traders earn from the derivatives market?

Yes, retail traders can make an income stream by trading derivatives. As Futures and Options are standardized contracts in the Indian market, you can freely trade them across exchanges. Some of the methods in which derivatives benefit traders are:

  1. Arbitrage Benefit

Arbitrage means purchasing low and selling high across exchanges. When a trader trades using derivatives, you can enhance the benefits of arbitrage trading. As the prices of assets are continuously fluctuating, you can buy low and sell high.

  1. Make money on sluggish shares

Many people hold the shares they buy for the long term, rather than taking benefit of price fluctuations in volatile shares in the short time. To avail of this, you should use derivatives tools. Trading on the derivatives market allows you to perform transactions without actually selling your shares.

  1. Safety from price instabilities

Hedging is one of the most common strategies that seasons traders follow. It protects you from a fall in the share prices that you own presently. The derivatives market offers assets that permit you to hedge against pride drops. It gives you access to products that safeguard you against a sudden rise in the share price you want to purchase.

  1. Risk transfer

The most important benefit of derivatives is risk transfer. Trading derivatives helps a trader enhance their security. There are several products and approaches that can help you pass on your risk.

 

Cons of Derivative Market Trading

Other than the benefits of derivatives marketing trading, here are some consequences too.

  1. Speculative nature

Derivative market assets are speculation assets. The contracts aren’t just risky but highly unpredictable at the same time. Inappropriate speculations in derivative contracts can cause immense losses which can wipe out a major portion of your invested amount.

  1. Counterparty risks involved

The derivatives contracts are traded on BSE and NSE, which are well-regulated. But, Over-The-Counter traded derivatives such as forwards are not regulated; hence slightly counterparty risks are involved.

Conclusion

Almost all assets traded in the stock exchange have their pros and cons, and derivatives are an inclusion. Trading in derivatives needs knowledge, experience, and skill. Thus, investors should conduct a comprehensive research about the procedure and draft efficient strategies to lower losses and maximize profits.

 

 


14-12-2021
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