• Historically the derivatives came into existence as an instrument to mainly manage and protect against risks.
  • Derivatives are just contracts sitting on top of underlying assets. Their values are dependent or “Derived” from the values of their underlying assets. They are legally binding agreements to BUY/SELL made in the exchange. The underlying asset can be a share, Index, currency, bond, interest rate or commodities like sugar, crude oil etc.
  • In the month of June 2000, trading in the derivative (F&O) segment commenced on NSE and BSE.
  • Since then this segment has seen exponential growth on both BSE and NSE.
  • The segment has seen the turnover grown from INR. 2365 Cr. in 2000-2001 to INR 16807782.22 Cr. in 2012-13.
  • In the year 2013-2014 The BSE witnessed 24,52,12,406 contracts, with a total turnover of INR 74,04,072.77 Cr. showing an average daily turnover of INR 34,120.15 Cr.
  • New stocks with good track records are added to the list which brings in fresh opportunities. The number of stocks in this segment keeps changing.
  • The most common derivative products are 1. Futures 2. Options
  • It is considered as a high risk, high rewards segment.

Advantages of trading in the F&O segment:

The primary advantage of trading in the F&O segment is that there is less investment involved and higher gains can be expected. For example: Mr. Rakesh wants to buy 1000 shares of ABC company which is currently trading at INR 100. Its expected target is say 110 and margin (explained further) in futures market is say 10%.

  • If he buys it in the cash market then Investment = INR 100000, expected Profit = INR 10,000 %Gain=10%
  • If he buys it in the F&O market then Investment = INR 10000, expected Profit = INR 10,000 %Gain=100%

Thus Rakesh makes huge money by investing less in the F&O market.

Other advantages:

  • Allows portfolio managers to hedge portfolios.
  • Allows you to trade on the direction of the market by allowing index based trading. Example: NIFTY/BANK NIFTY F&O.
  • Allows you to make money in both bullish and bearish market.