If you know what derivatives are, you must have come across the term Futures and Options several times. What you may not know is the exact meaning of F&O trading or how the whole thing works. Another concept connected to derivatives is MCX or Multi Commodity Exchange of India Limited.
Published on 06 February 2023
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Here, we’ll take a look at the features and benefits of both F&O and MCX trading.
First Things First: What is a Derivative?
Like stocks, bonds, and debentures, derivatives are financial instruments. They derive value from an underlying asset, which can be anything from stocks and bonds to interest rates, currencies, commodities, and market indexes.
Futures and options are essentially two types of derivatives that can be traded on the stock exchange. In the same vein, commodity derivatives are also a type of investment tool that facilitates profit-making from specific commodities without actually owning them. More about this when we look at MCX trading.
F&O Trading Meaning
Futures and options are both derivative financial contracts between two parties, aka buyer and seller. They are signed by the parties for trading stock assets at a predetermined future date and price. However, these two contracts work in different ways. Also Read: Everything You Need to Know About F&O Stocks
A futures contract initiates a transaction between the buyer and seller in the future at a price that has been locked down. Once you enter into the contract, both you and the other party have an obligation to fulfil it. If your market prediction turns out to be correct and you profit from your purchase, the seller must follow through on it, and vice versa.
On the other hand, options trading also involves a contract, but it does not oblige the parties to honour that contract. Rather, it gives you the right to buy or sell specific assets on a predetermined date at a set price. If you decide to follow through, it’s called exercising an option. This lack of obligation is what separates a future trade from an options trade.
Therefore, F&O trading allows you to trade in different futures and options. It lets you buy or sell a stock in the present and pay or earn in the future, effectively implying that you can buy more shares even if you have less capital.
Here are the main features of F&O trading:
It is among the most popular forms of trading in India.
The contract entails the date, price, and lot size of the transaction, which are all fixed.
To ensure the completion of the contract, you will first have to pay a margin to the broker. Only then can you take a buy or sell position with respect to a future.
Unlike shares, derivatives come with an expiry date that is known to the traders in advance. If the seller fails to square off their position before that date, the contract expires.
Since the transactions are settled in cash, you don’t need a DEMAT account for F&O trading.
MCX Trading Meaning
As the name implies, the Multi Commodity Exchange of India Limited is the first-of-its-kind commodity derivatives exchange in India that permits you to trade in commodity derivatives. These commodities may include valuable metals, agricultural commodities, energy, oils, spices, etc. Falling in the purview of SEBI since 2003, MCX operates similarly to the Bombay or National Stock Exchanges. Know more about NSE & BSE
Here are the main features of MCX trading:
Trading in commodities can help you diversify your portfolio, giving you the potential to increase your profits and decrease your risks.
MCX follows a transparent, organized structure when it comes to trading volumes and changes in prices, allowing you to make more educated decisions.
You can trade in hard commodities like oil or gold or soft commodities like agricultural products. Also Read: Agri Commodity Trading
Futures are used in the different stock markets to guard against price volatility. For investors who wish to take advantage of the price volatilities in the market, investing in stock futures can be the best solution. A futures contract provides a buyer or a seller with the right to buy or sell an asset at a specified future price.
Options are derivatives in the trading strategy that are amongst the most popular tools for traders in the stock markets. This is because the price of the options can move very fast, thereby making the investors lose or make a lot of money quickly. Options strategies can range from complex ones to simple ones, with several payoffs, and at times with odd names.
Futures and options trading was introduced in Indian stock exchanges in 2000. Futures and options are known as derivatives because they derive their value from an underlying asset. However, the two are not the same. Futures trading differs from options trading in some ways.
Futures are used in the different stock markets to guard against price volatility. For investors who wish to take advantage of the price volatilities in the market, investing in stock futures can be the best solution. A futures contract provides a buyer or a seller with the right to buy or sell an asset at a specified future price.
Options are derivatives in the trading strategy that are amongst the most popular tools for traders in the stock markets. This is because the price of the options can move very fast, thereby making the investors lose or make a lot of money quickly. Options strategies can range from complex ones to simple ones, with several payoffs, and at times with odd names.
Futures and options trading was introduced in Indian stock exchanges in 2000. Futures and options are known as derivatives because they derive their value from an underlying asset. However, the two are not the same. Futures trading differs from options trading in some ways.
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