Playing a crucial role in modern financial markets, derivatives provide a way to hedge risks, speculate on price movements and diversify investment portfolios. In India, derivative trading has come a long way since its inception. If you want to trade in derivatives and learn where they are traded in India and how you can start your journey in derivative trading in India, this blog can be your handy guide.
What are Derivatives?
Before learning about the platforms offering derivative trading in India, let’s understand derivatives. They are financial instruments deriving value from an underlying asset, including stocks, commodities, market indices, and currencies.Â
Hedgers, speculators, market makers and arbitrageurs are four major participants in the Indian derivative market.
Key Exchanges Offering Derivative Trading in India
India’s two premier exchanges facilitate derivative trading – NSE and the BSE.
Derivative Trading on the NSE
NSE, or the National Stock Exchange, is one of India’s most popular platforms for derivative trading. The derivative segment, also known as the Nifty Futures and Options (F&O), is well-known for its liquidity and efficiency.Â
On 12th June 2000, the NSE launched trading in index futures based on the Nifty 50 Index, marking a milestone in the history of India’s financial market. Shortly after this, on 4th June 2001, NSE came up with index options based on Nifty 50. More innovation followed with the launch of options and futures on individual securities on 2nd July and 9th November 2001, respectively.
The NSE offers a range of derivative trading contracts, including:
- Index Derivatives: These are futures and options on indices such as the Nifty 50, Nifty Bank, Nifty Midcap Select and Nifty Next 50, among others.
- Stocks Derivatives: These are futures and options on individual securities matching the eligibility criteria of SEBI.
Derivative Trading on the BSE
BSE or the Bombay Stock Exchange is another platform where you can indulge in derivative trading. While the derivative segment of the BSE is smaller compared to the NSE, it provides futures and options trading on indices along with individual stocks.Â
What adds to the versatility of the BSE is the fact that it facilitates derivative trading in NSE’s futures and options, too. This gives you access to various derivative instruments, allowing you more flexibility and options to diversify your portfolio. Therefore, irrespective of whether you want to trade in specific stock-based derivatives or index-based contracts, the BSE’s platform can cater to a broad spectrum of your derivative trading needs.
Types of Derivatives Traded
While you can trade in various derivative instruments, the most common ones include:
- Futures Contracts: These are agreements that allow you to purchase or sell an asset at predetermined prices on specific future dates.
- Options Contracts: These are contracts where you have the right to buy or sell an asset at predetermined prices. Options are further divided into call and put.
How to Get Started With Derivative Trading?
Now that you know the platforms to start derivative trading let’s see how you can get started with it. To engage in derivative trading:
Open a Demat Account
First and foremost, you need to open a Demat account to participate in derivative trading. While you need to look at the broker’s reputation and cost, among several other things, before opening a Demat account, equally essential is to check if your chosen broker offers access to both NSE and BSE’s derivative trading platform.Â
Opting for a broker offering access to the derivative platforms of both the NSE and BSE can help you diversify your investments to a large extent.
Learn the Basics
Once you have a Demat account, the next step is to learn about the basics of derivative trading. Derivative trading is more complex than regular stock trading and carries considerable risk. Hence, you need to have a solid grasp of how derivatives work and adopt risk management techniques to cut your losses if things don’t go as planned. Ample material is available over the internet, which allows you to hone your derivative trading skills.
Analyse Markets
Market analysis is critical to making informed decisions in derivative trading. Using charts, indicators, and other things can help you analyse the market and make smart moves. Stay updated on markets to avoid being caught on the wrong foot.
Start Small
Start small to understand the market dynamics before investing a large sum of money. As derivative trading is riskier, it’s essential not to pour in a huge sum of money upfront as it can magnify losses. Also, it’s important to ensure you invest an amount you can afford to lose. You can start investing more once you gain confidence.
Conclusion
Leveraging the platforms of the NSE and BSE for derivative trading can help you hedge your portfolio, speculate on future price movements and diversify your investments. That said, you need to do your homework well to enhance your chances of success. Equally essential is not to get carried away and rely on tips and tricks offered by unverified and unauthorised sources to conduct trading in this dynamic segment.
If you are searching for a reliable brokerage platform to kickstart your derivative trading journey, look no further than HDFC SKY. With advanced tools, expert support and real-time data, derivative trading through HDFC SKY can help you manage your risks strategically and enhance your return potential. Open Demat account today and start your derivative trading journey with confidence.