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As its name suggests, Derivative is a financial contract whose value is derived from the underlying asset (the commonly used assets are stocks, bonds, currencies, commodities and market indices). The value of the underlying assets keeps changing according to market conditions. The basic principle behind entering into derivative contracts is to earn profits by speculating on the value of the underlying asset in future.
There are mainly 4 types of Derivative Contracts: Forwards, Futures, Options (Call options & put options) and swaps. However, swaps are not traded in the Indian stock market.
Let us assume that there is a company ‘A ltd.’ who are involved in the production of pre-packaged foods. They are a large consumer of flour and other commodities, which are subject to volatile price movements, and in order to maintain consistency with their products and meet their bottom-line objectives, they need to be able to purchase commodities at a predictable and market-friendly rate.
And on the other hand, there is a Farmer, who grows wheat and has the risk that the price of the wheat may fall by the time he harvests his crops. Therefore, the farmer and the company ‘A ltd.’ both would want to hedge their risk. In order to do this, they both would enter into a derivative contract to buy a certain amount of their crop at a certain price during an agreed period of time.
Currency trading commonly referred to as Forex, is the purchasing and selling of currencies in the foreign exchange marketplace, done with the objective of making profits.
In India, currency trading is done on BSE (Bombay Stock Exchange), NSE (National Stock Exchange), and Multi Commodity Exchange Stock Exchange (MCX-SX). Trading in the market is available from 9 am to 5 pm. In currency trading, the trade is always between the pair of currencies. Unlike in the stock market where you buy a share of a company, currency trading involves taking a position on a currency pair. For example, the EUR/USD rate represents the number of US dollars one Euro can buy. If you think the Euro will increase in value against the US dollar, you buy Euros with US dollars. When the exchange rate rises, you sell the Euros back, and you cash in your profit.
In Indian exchanges, the currency derivatives segment provides trading in currency futures on 4 currency pairs, cross-currency futures & options on 3 currency pairs (EUR-USD, GBP-USD, and USD-JPY).
Commodity trading happens on a commodities exchange like National Commodity & Derivatives Exchange Limited (NCDEX), Multi Commodity Exchange of India Limited (MCX) and Indian Commodity Exchange Limited (ICEX), where various commodities and their derivatives products are bought/sold. The most commonly traded items are agricultural products and contracts based on them. But, increasing non-agro commodities are also being traded like diamonds, steel, energy items etc. The trading timings of commodity exchange from Monday to Friday are IST 10 am to 11:30 pm/ 11:55.
At present commodity trading in India offers 100+ products to choose from. As trading in commodities is a high-risk exchange, based on your selection, you may earn profits or undergo losses.
Commodities which are traded fall into the following categories:
From the above categories, as per the customer reviews, there are some categories that are considered to be the best commodities to trade:
As the name suggests, Intraday trading means trade within a day. For instance, you can buy the stock of ABC Ltd. at Rs. 495 and sell it at Rs. 500 to capture Rs. 5 profit. All you have to do is to be disciplined enough to close the trade at Rs. 500 and not wait or get impatient for the price to climb to Rs. 505. Which unfortunately many people do and lose money because the price moves sharply. Instead of rising to Rs. 505 the prices can move back to Rs. 490 in a few minutes.
Similarly, you can make money even when the stock price is falling. In day trading you can sell the stock first and buy later (it’s called short selling). For instance, if you predict that shares of Quess will go down, then you can sell first at Rs. 406 and buy within the same day at Rs. 397, again making a profit of Rs. 9 per share.
As a beginner intraday trading may look like a safe and quick way to make profits, and that is why it looks like an attractive option, but there is much more to intraday trading than what just appears on the surface.
Intraday trading has very high returns on investment, but along with that come high risks. intraday trading is not safe, especially for a novice. It is highly risky due to the extreme volatility of the market. The prices may swing beyond expectations and may lead to unanticipated losses. hence, intraday trading is on top of the risk spectrum and is not advisable.
The market timing for trading is between 9:15 am to 3:30 pm and any time during this period is acceptable for taking intraday positions. It is suitable for the equity market and the timing can vary for commodities and currencies.
Margin refers to money borrowed from a brokerage firm in order to leverage an investment. It is the difference between the total value of securities held in an investor's account and the loan amount from the brokerage firm. Buying on margin is like borrowing money to purchase securities. You pay only a certain percentage (margin) of the cost; the rest of the money is borrowed from the broker.
Margin trading refers to the process of trading where investors could buy more stocks than they can afford to. Investors are allowed to buy stocks by paying a marginal price of their actual value. Margin trading can be considered leveraging positions in the market, either with cash or security by investors.
Such trading transactions are funded by brokers who lend investors the cash to purchase stocks. The margin can later be settled when investors square off their positions.
A Mutual Fund is a collective saving and investment vehicle that pools the savings of a number of investors who share a common financial goal. Investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy. The money thus collected is then invested by the fund manager in different types of securities such as shares, debentures, money market instruments, depending upon the scheme’s stated objectives. The income earned through these investments and the capital appreciation realized by the scheme is thus passed back to the investors as returns. Therefore, a Mutual Fund offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low-cost.
Mutual Fund offers two types of plans to investors ‘Direct Plan’ and ‘Regular Plan’.
In the Direct plan, there is no involvement of the third party and you could buy directly from the mutual fund company. There are no commissions and brokerage. Hence the expense ratio is lower. Whereas, in the Regular plan is what you buy through an advisor, broker, or distributor (intermediary). In a regular plan, the mutual fund company pays a commission to the intermediary.