Features of derivatives market19th October 2022 0 By indiafreenotes
A Derivatives Market is a financial marketplace where financial instruments, such as options and futures, and other derivative instruments are traded. Different types of investors take part in this market with varying objectives. For instance, some want to earn a profit, some speculate, while some enter the market to hedge their risk.
- Investors should take care to study the derivatives market before trading as their rules. And regulations are quite different from that of the stock market.
- Before you begin trading, individuals must deposit a margin amount, which once paid, cannot be withdrawn until after the trade is settled. Furthermore, if it ever falls below the required amount, the individual must replenish it before continuing to trade.
- To trade on the derivatives market, the trader must possess an active trading account with a permit for derivative trading.
- To buy stocks, traders must look at factors such as cash available, margins, contract price and price of shares.
- As transactions occur in the future, within the market, it is easier to short sell
- The market has low transaction costs as the market is heavily standardised owing to low risk
- The most important underlying assets which determine the cost of a derivative are stock prices, exchange rates and interest rates
- In some cases, derivatives can also be used to determine prices of the underlying assets
- They also help in improving the efficiency of financial markets by allowing better accessibility and visibility
- However, the high volatility of the derivative market results in huge losses if uncalculated steps are taken. And hence, investors must be very careful while investing in derivatives.
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