WHAT ARE DERIVATIVES?
The word “derivatives” comes from the word “derive” which means to obtain something from another source. In the Stock market, a derivative means an instrument that derives its value from another underlying asset. These underlying assets can be shares/stocks, commodities, currencies, etc. Derivatives do not have any value of their own, independently or individually. Their value will always be dependent on the underlying asset.
A derivative can trade on an exchange or Over the counter. Some common types of derivatives are futures contracts, forwards, options, and swaps.
Key differences between Equity shares and derivatives are as follows:
| Sr. No. | Shares | Derivatives |
| They have their own independent value | They do not have their own independent value | |
| 2 | They can be held forever, with no time limitations | Derivative contracts have an expiry date |
| 3 | They are less riskier | They are more riskier |
| 4 | They are suitable for all | They are suitable for investors with extensive experience in the capital market |
| 5 | Their performance depends on demand and supply, financial results of companies, macroeconomics, etc. | Their performance depends upon the performance of the movement of the underlying asset |
| 6 | They can be less volatile than derivatives | They can be more volatile than shares. |
These are some ways that derivatives differ from equity, which helps us understand them better.
The key to making profits in the market is to invest and trade wisely and smartly in both. And to do so, Stakeindia is here to help you.
Stakeindia is the oldest stock market training institute in Nashik, Maharashtra; where we teach our students and clients just exactly how to strike the balance in trading and be most profitable.
Get in touch with us at stakeindiainstitute@gmail.com to know more!
