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Derivatives are financial instruments whose price is determined by some underlying variables. Derivatives can be traded directly between the two parties as well as through exchanges. There are different types of derivatives based on the type of assets that it deals in such as commodity, equity, bond, interest rate, index and so on. Mainly there are four types of derivatives that are traded – Future, Forward, Options and Swaps. In case of stock market derivative trading essentially means trading in future contracts and options. In derivative trading, stocks are bought in the form of contracts and in a lot.

The biggest advantage of derivative trading is that you can buy huge amount of stock by paying only a part of the total value of the stock. As in derivative trading you have to buy the stocks in a lot the price of the lot is relatively lower than the total amount stock you get. So, this means you have a chance of making profit even by investing a comparatively less money.

Derivative trading also lets you short sell the stocks. That means you can sell the stocks even before you actually own them. This is beneficial when you have an idea that the price of a particular stock is going to reduce. In derivative trading you can first sell the stock at a higher price and then buy the equal number of stocks when the price has gone down. In that way you can make profit in derivative trading even if the price is going down.

In derivative trading the brokerage is relatively lower than the cash segment. If you consider the number of stock that you purchase in the form of future contracts then you will find that you have to pay less brokerage compared to the cash segment.

While dealing in derivatives the only thing that you need to be careful is the expiry dates of the contracts.



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