A derivative, according to Mikial Nijor, is a legal financial agreement that enables investors to buy today and sell tomorrow certain assets. A derivative contract has a definite and predetermined expiration date. In the stock market, trading deriva...
Mikial Nijor says the US stock market is an excellent platform to systematically invest and generate wealth over time. Among the array of asset classes available to diversify and earn good returns, derivatives are the most commonly used. Mikial Nijor says in the past, derivatives trading appeared to be a complicated venture for investors due to the use of multiple techniques and financial terminologies.
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So What Exactly is Derivative Trading?
Mikial Nijor a derivative is a formal financial contract that permits investors to purchase and sell an asset on a future date. The expiration date of a derivative contract is predetermined and fixed. Derivative trading in the stock market is superior to buying the underlying asset as the gains can be significantly amplified.
Furthermore, derivative trading is a leveraged form of trading, allowing investors to purchase a large quantity of the underlying assets by paying a small amount. Derivative contracts come in two types, futures, and options. Essentially, both futures and options involve the investor and the seller predicting the price of the underlying asset for a particular future date.
The Derivatives Market can Trade Four Different Sorts of Assets.
Options Contract
Depending on the type of options contract, the buyer is given the opportunity, but not the responsibility, to buy or sell the underlying securities to a different investor over a predetermined period. The writer of the option is the person who sells the contract, and the security price in the options contract is referred to as the strike price. After paying the premium to the writer of the option, the buyer of an options contract is free to pass on the exercise right. Options contracts come in two flavours: call options and put options.
Futures Contract
In the derivatives market, a futures contract requires both parties to exercise the agreement within the specified time frame. The parties involved established the quantity of the underlying assets and the price that the buyer would pay at a certain future date. In contrast to options, futures contracts must be exercised by either the buyer or the seller prior to the expiration date. Futures contracts include things like currency, index, and commodity futures.
Forwards
Forwards are financial agreements between two parties that require execution of the underlying securities before the expiration date, based on a predetermined amount and price. Forward contracts, like futures, require both parties to exercise their options prior to the expiration date. But rather than a regulated stock market exchange, investors can only trade such contracts on an over-the-counter market.
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Swaps
Financial instruments called swaps enable two parties to swap or exchange their liabilities or financial commitments. Based on an interest rate, both parties agree to the contract's cash flow. One cash flow under this contract is often fixed, whilst the other fluctuates according to the benchmark interest rate.
Conclusion
According to Mikial Nijor, derivatives give different investors the opportunity to protect themselves against potential losses or profit from price differences. Although they can offer the participants a variety of rewards, it is important to trade them cautiously because they demand substantial knowledge to trade properly.
Question/Answers
Que. What is derivative trading?
Ans. Derivative trading is a form of financial contract that allows investors to buy or sell an asset for a future date. It is a leveraged form of trading where investors can buy a large quantity of underlying assets by paying a small amount.
Que. What are the types of derivatives contracts?
Ans. The two main types of derivative contracts are futures and options. Both futures and options are contracts that predict the price of an underlying asset for a specific future date.
Que. What are the four types of assets tradable in the derivatives market?
Ans. The four types of assets that can be traded in the derivatives market are options contracts, futures contracts, forwards, and swaps. Options contracts give the buyer the right, but not the obligation, to buy or sell the underlying securities to a different investor over a predetermined period.
