Worried about your investments when the economy is looking down? You need to learn about derivatives. Simply put, a financial derivative is a monetary instrument. Its value is derived from the value of an underlying asset. This includes the financial obligations of the parties as well as the promise of sale and purchase of assets at a future date. There are certain conditions of this contract: the contractual responsibilities of the parties, the date of maturity, the notional amount, and the consequent values of the underlying instruments.
What are the assets on which the derivative contracts are available?
1. Stocks: You can own shares in a company by buying stocks.
2. Bonds: Bonds are a financial instrument of debt that’s used as a tradable asset. Bonds consist of principal and interest rates (coupon rate).
3. Currencies: Currencies are also traded, as they have a particular value compared to other currencies that keep on fluctuating.
4. Commodities: Products such as cotton, wheat, gold, and silver are traded on the commodities exchange as the prices of these change depending on the demand and supply.
5. Market indices: It is calculated after evaluating the price of numerous stocks of a particular category e.g., Sensex, Nifty.
Here’s an example to help you understand better: Your friend Ramesh wants to sell you a laptop for ₹15,000. You need it, but you may not be in a position to buy it for another five months. So, Ramesh and you will agree on certain terms of agreement, like the date of payment and the specification of the laptop in this case. Now, Ramesh is under an obligation to sell the laptop to you for ₹15,000 after five months, although he may have an offer from someone else for the same laptop for ₹20,000. In this case, you may have to pay Ramesh a small amount to ensure he performs his part of the obligation and this is called “premium”.
Furthermore, there are types of derivative contracts named as follows:
Futures and Forwards
Options
Swaps
What are forwards and futures?
This guarantees that the buyer will buy an item at a favourable price at a future date, and the seller has to sell it at that predetermined price. If you think prices would probably go up or down sharply, then Futures or Forwards are good options to protect the price risk.
What are options?
Options are a monetary arrangement that offers the buyer the option but not the obligation to buy or sell the underlying asset at a specific price on or before a certain date.
What are swaps?
Swaps are a type of financial instrument that allows for the exchange of cash flows or liabilities from two different financial instruments.
Let’s look at some advantages of derivatives
Market efficiency - Derivative trading involves the practice of arbitrage opportunities. This ensures that the market finds balance and that the prices of the underlying assets are accurate.
Determines an underlying asset's price - Derivative contracts are frequently used to determine the price of an underlying asset.
Low transaction costs - Derivatives contracts are risk management instruments and therefore they help to reduce market transaction costs. As a result, as compared to other securities such as debentures and shares, the cost of transactions in derivative trading is cheaper.
Useful in risk management – Derivative contracts are used in risk management since their value is directly proportional to the price of the underlying asset.
Mr A, for example, purchases a derivative contract whose value moves in the opposite direction of the asset he owns. He'll be able to compensate losses in the underlying asset with earnings from the derivatives.
All of the above advantages can be gained by subscribing to Flashh scheme.
What is Flashh scheme?
Flashh scheme is introduced by HDFC Securities for the youth of India, specifically for those young men and women who are under the age group of 30.
Unique features of Flashh scheme:
Equity intraday volume would be free for 180 days.
From the first day onwards, derivatives would cost ₹20 per order.
Stock delivery brokerage would have a retroactive validity of 0.50%, while intraday stock brokerage would be 0.05%.
Within 30 days of the account's establishment, you must take the derivatives privilege.
For all stocks transactions, including intraday and delivery, a minimum charge of ₹25 per order would be charged (except from free volume and subject to a 2.5% cap). A brokerage fee of 5 paisa per share will be imposed for securities valued less than ₹10. (subject to a ceiling of 2.5%). After completion of 180 days, free intraday volume customer can opt for our “Value Plans” to avail discounted rate benefits in equities further.
So where can you avail of the above scheme?
The above scheme is provided through HDFC Bank Demat Account. For further details, you can visit here to open an account. Click to get started now!
Click here to read more about how a Demat Account is now empowering senior citizens to trade like pros
*Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.