Futures and Options are contract-based trading instruments that do not create ownership. These instruments are called futures because the contract is based on a price that the asset will be valued at a time in the future and the buyer will have to buy the asset that is being traded at a value that has been agreed upon in the contract as soon as the contract matures.
While previously, F&O were only associated with indices in the Indian stock market, they are now a major part of the Indian stock exchange with almost all individual stocks having a futures component.
F&O can be traded in all kinds of assets including stocks, shares, equities, gold, securities, exchanges, as well as commodities like wheat, pulses, coarse grains, cotton, coffee, etc.
What are Futures and Options and why to trade in them?
Futures and options are nothing else but a contract derivative of an asset that can be traded in the stock market. This instrument is named so because the contract that guides trading in both is set in the future.
That is the buyer promises to buy the traded asset from the seller at a future date based on a certain fixed price. This rate would still hold good until the maturity period of the contract even if the market price of the traded commodity rises.
If the price of the commodity in the market rises, the buyer can still buy the commodity from the seller at the fixed price and then sell the commodity to someone else at the higher market price.
That is in this scenario, the buyer makes a profit, and the seller suffers a loss. If the price of the said commodity goes down in the market, the seller makes a profit, and the buyer suffers a loss.
The return on investment for F&O can be very high and that is why they have emerged as a popular investment option among traders and investors.
How to start trading in futures and options?
Unlike stocks and equity shares, F&O do not create ownership and hence, SEBI does not require traders to have a Demat account linked to their trading account to trade in both.
This implies that if you have a derivative trading account opened in your name with a stock brokerage firm registered with SEBI, you can go about trading in F&Os in the stock market.
You could start with trading in indices like NIFTY or go for Future contracts in commodities. The stock exchange now lists several futures and options for individual shares and stocks as well.
However, before you start trading in futures, you should be fully aware of the risks involved and the market trend for the last few trading sessions.
Intraday trading is considered to be more risk-averse and is a great option if you want to trade in F&Os within a single trade window.
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