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What are options and futures? Should you trade in them? - Yogesh
Futures and options are two prominent types of derivatives which allow investors to trade stocks at a leverage and at a pre-agreed price on a future date.
Unlike purchasing shares upfront, futures investors pay a percentage (margin) of the total contract value. For instance, with a 20 per cent margin on futures in a stock, investors can buy or sell five times more shares in futures than in pure equity. This allows an investor with Rs 10 lakh to purchase or sell stocks up to Rs 50 lakh.
Hedging - An aspect in derivatives
The main purpose of using futures and options is to hedge your portfolio. But many people use them in a highly speculative manner for making quick money. While successful trading can result in significant profits, futures and options trading is extremely risky, and a single bad trade can wipe out all profits made over time. There are some mutual funds also that use hedging as a strategy, such as arbitrage funds, equity saving funds, and dynamic asset allocation funds.
What you should do
While speculating in futures and options (derivatives) may seem appealing and an easy way to earn money, it can be very risky and is no less than gambling. In fact, the CEO of a leading online broker even exclaimed that less than 1 per cent of their customers who trade in equity derivatives earn higher returns than bank deposits. Ideally, retail investors should stay away and avoid trading in futures and options.
Suggested read: The giant underbelly of the markets
This article was originally published on February 14, 2023, and last updated on March 01, 2023.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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