Future and Options: Why They Hold Importance in Financial Markets?
Indira Trade a Stock Brokerage Firm in India describes the importance of future and options in financial markets. In stock market the essential financial instruments include Future and Options. These are termed the derivative instruments which brings certain degree of change in the functioning of financial markets. It’s not easy to grasp concept of both, as they are distinct.
What is meant by future trade?
Futures are form of contracts which can be utilized in trading of the instrument of investment. Such kind of trade is to be done in future on some specific date. Generally future trading happens in future contracts.
Two parties have to get involved in this, as prediction regarding investment value is done. Transfer is to take place among two parties based upon the prediction. When expected price id met on the decided date, profits are created and if this does not happen than losses are made.
Experienced professionals that have knowledge of future trading and the risk involved must try taking this. There is much higher degree of risk in future than options. This is because buyer and the seller would have to take actual delivery as they are obligated for this. Features of such future trading contract are standard and are met strictly. Settling of these is generally based on three ways:
- Actual delivery
- Cash settlement
- Squaring off transaction
Meaning of options
Options are distinct and are type of investment that has the security trading. The date is specific and the price is mutually agreed. These help to do prediction of price in future regarding securities. Generally options are of two major types:
- Buy or the Call- this gives right of buying an instrument depending on agreements related to date and price.
- Put or Sell- holder of instrument gets rights to sell on price agreed and on certain date.
Options could be sold easily even prior to delivery date. There is no sort of obligation for taking delivery, or buying something. Both future and options would allow better risk management as an advantage. Also levels of the liquidity would get enhanced due to future and options.