What is Derivative Market? Meaning, Types, Participants of Derivative Market

A Study of Derivative Markets in India

Meaning & Participants of Derivative Market

Do you know What is Derivative Market? It is a kind of instrument that is traded in the stock Exchange. What exactly it is that we will see further. This article is all about “Derivative Market – Meaning, Types, Participants, and Differences”

Derivative is a kind of instrument that derives its value from the underlying asset. This market was initiated in India in 2000 and since from then it is gaining the pace in the stock market significantly. You know that derivatives are highly leveraged instruments that increases the risk and rewards.

These underlying assets can be any sort like shares, debentures, currency and many more. Let’s start with know about the derivative markets first.

What is a Derivative Market?

Meaning Derivative Market: Derivative instruments can be traded on the stock exchange or can be traded on the over the counter (OTC). Exchange simply defines about the establishment of the stock exchange where all the securities are traded and follows the rules and regulations by the SEBI.

Over-the-Counter (OTC) market defines about dealer oriented market of securities, which is unorganized market and where the trading happens using the mode of phone calls, emails etc. Derivative that are traded in the stock exchange are standardized and follows the regulations.

Where, the OTC market in which the derivative instruments gets deal are sort of customized market and lack of regulation in it and with that it also has higher counter party risk. These financial instruments helps in making the profit by making bet on the future value of the underlying asset.

It also provides an opportunity of arbitrage.

It also hedges the securities.

In this, you transfer the risk to another.

Why do investors find lucrative in derivative contracts?

There are more advantage of dealing in the derivative contracts apart from making the profits.

  • It gives arbitrage advantage.
  • It can be also used for speculation.
  • It also provides the protection against the market volatility.

Participants in Derivative Market

Following all are the derivative market participants:

  • Hedgers
  • Margin Traders
  • Speculators
  • Arbitrageurs

Different Types of Derivative Contracts

1. Options

  • Options are the agreement between the buyer and the seller.
  • In which the buyer gives the right but not the obligation to buy or sell certain asset at a later date on an agreed price.

2. Futures

  • These are the standardized contracts and are traded on the stock exchange.
  • This is an agreement between the two parties for a particular contract at a specified time and on an agreed price beforehand.

3. Forwards

  • These are the customized contracts and traded on the Over the Counter (OTC) Market.
  • This is also an agreement between the parties for a certain contract at a specified time and on an agreed price.

4. Swaps

  • Swaps are also a type of derivative contracts where the parties exchanges the cash flows at a certain interest rate.
  • Interest rates swaps are mostly used instrument of the derivative market and swaps are traded on the over the counter (OTC) Market.

We had already discussed about the types of derivatives market. Now, let’s have some discussion on the types of the futures, as they are traded on the exchange traded funds.

Types of Futures Contracts

1. Stock Indexes Futures

2. Stock Futures

3. Commodity Futures

4. Currency Futures

5. Interest Rate Futures

Now let us see some types of margin requirements in the derivative trading:

Types of Margins Requirements

a) Initial Margin

b) Maintenance Margin

c) Variation Margin

Difference Between Cash Market and Derivative Market

Let us find out the difference of Cash Market and Derivative Markets:

Cash Market

  • In cash markets, you can purchase the single shares also.
  • In Cash Market, tangible assets are traded and are used for investment purpose.
  • Cash Markets need for the customer to open the trading account.
  • In cash market, the dividend are entitled to the owner of the shares.

Derivatives Market

  • In the derivatives markets, which can be futures or options you need to purchase minimum lots that are fixed.
  • In the derivatives market, the assets can be tangible or intangible for trading and it is used for hedging, speculation or for the purpose of arbitrage.
  • While, in the derivative market the customer needs to open the future trading account from the derivative dealer.
  • In derivative markets, the holders are not entitled for the dividends.

Conclusion

Under this article, we managed to inform you about the basics of the derivative market and its types and how it get traded in the market. Hope that you like this article on “Derivative Market Meaning, Types of Derivatives Contracts,  Participants in the Derivative Market and Difference of cash market and derivative market” if you like the blog then you can also share with your mates for the same.

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