What is derivative market and how does it work?

Equity, derivative or future and option are the financial instrument of capital market. capital market is market where different securities are traded for long term where liquidity is low as compare to the money market.Ways2capital Investment Advisor (Indian company) is the leading investment advisory who provide there recommendation according to individual risk appetite of that individual person

The capital of a company is divided into shares. Each share forms a unit of ownership of a company and is offered for sale so as to raise capital for the company.

Equity market is market where different share of equity of a company are issued and traded by different traders or investor. Securities are issued through IPO in primary market. and secondary market is market where issued securities are traded on long term or short term basis. equity market is base market where actual money in demat is replaced by share when you purchased this.

Derivative are the financial instrument whose value is derived from underlying asset. this are the one month expiry contract that gives the opportunity to deliver the asset or final settlement on fixed future date. there are mainly two types of derivative contract.

OTC : over the counter contract this are customized bilateral contract between two parties like Forward and Swap. in this type of contract some risk are associate. like

Credit Risk

Operational Risk

Exchange Traded Contract: this are standardized format of OTC contract. that limited the risk that are associate in forward and swap. Future and Option

Future are the exchange traded contract. in NSE currently 175 stocks are available in market whose derivative are available. this are the 1 month expiry contract and follow 3 month contract cycle. where you just have to pay a margin amount not actual price of share.

Option are the contract that gives you a right but bot the obligation to buy or sell an underlying asset on fixed future date and at agreed predetermined price. there are two types of option are there.

Call Option : Gives you a right to buy an asset

Put Option : Gives you a right to sell an asset.

In option a trader just need to pay premium amount that is very less as compare to cash or equity price or future margin of stock.

The main purpose of future and option is to reduce risk through hedging and arbitraging.