What is Derivative?
When one sells or acquires assets, a security agreement is signed between two or more individuals with regards to the asset’s future which can be called a ‘contract’ whereby investors can predict the impending value of it and thereby make a profit out of it.
What are Equity Derivatives?
When a derivative is evaluated from one or more underlying equity securities, at least partially, then it is known as an equity derivative where one can choose from options and futures that are usually available on the NSE Indices and Stocks. These underlying assets can include the shares that one owns that are a kind of equity security, bonds and commodities that fluctuate according to the stock market or the derivatives market and the companies that make a profit. The share price determines the value of the share being acquired.
Benefits of Equity Derivatives
There are various benefits of equity derivatives that include risk management, settlement, fluctuation protection and the like that are discussed below:
- Equity derivatives are traded to transform the risks into assets from individuals who do not like to take risks but do take them.
- Investors who want to get the benefits of the short-term fluctuations in price even though they keep their shares for a longer time span can invest in equity derivatives in the derivative market.
- Hedging protects investors from a fall in price that they own but also ensures them against inflation of shares that they want to purchase.
- When a share is bought and sold simultaneously in two separate share markets, to make a profit from the difference in the price because it can be expensive than the other market from which it is sold.
- The entire value of a contract is not paid when buying equity derivatives. It can extend to a huge amount as well. So long as the outstanding balance is high, accurate speculations can rake in higher profits.
Different Types of Derivatives
There two types of derivatives, namely, futures and options.
These derivative contracts are used for time specific and price specific derivative trading. These must be sold by the investor within the stipulated amount of time and a specific price that can garner an unspecified loss or gain, depending on the derivatives market that come from trading activity, otherwise, they lapse and are of no use at all.
The investor who buys options equity derivatives can buy the asset without any constraints or clause but the seller is obligated to agree with the clauses that are there in the derivative contract when he sells the shares. The gain is not limited, but losses are usually not that heavy, but it is garnered as a circumstantial casualty of the derivative markets. Options shares are supposed to be sold once the buyer acquires them.
The buyer of any equity enjoys almost the same perks that the owner of the company of that equity enjoys, so it is wise to invest in them, specifically.