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Make It Big With Derivative Trading

Derivative trading is a type of investment that you can make at the stock exchange. In derivative trading or future trading stocks are bought in lot. In fact future trading is a contract that comes with a time frame that means you have to sell that stock within that stipulated time frame. The number of stocks in a lot varies from stock to stock and price of the lot is determined by the number of stocks in a lot multiplied by the current price of that stock. There are certain pros and cons of doing derivative trading.

Advantages Of Derivative Trading –

The biggest advantage of derivative trading is that you can buy stocks in future trading by paying only 20% or 30% of the price. That means if you are buying a stock of Rs.10 each and the lot contains 1000 stocks you can pay only Rs.2000 to Rs.3000 to buy the lot. Whereas, the stock price in that cases would have been Rs.10000. So, you are gaining more profit at a time without investing more money.

In case of derivative trading you can short sell the stocks. That means you can first sell the lot of stock and then buy them back within the stipulated time to honor the contract. In case of an overvalued stock that are sure to fall in near future, you can gain from short selling. This is an option that you can not get in equity trading unless you are doing intraday trading.

In future trading the brokerage is usually lower than the equity trading. As you are buying the stocks in a lot the brokerage is calculated not on the unit of the stocks but on the unit of the lot.

Disadvantages Of Derivative Trading

The biggest disadvantage of the derivative trading is that you have a time frame to complete the selling of the stock. If the stock price does not rise up to the expected level, even then you have to sell off the stocks to honor the contract.

Another negative aspect is that the if the stock price fall then the investor loose huge money in derivative trading as the amount of stock involved in this trading is huge.

Another limitation of derivative trading is that not all the listed stocks are available for derivative trading. There are selected stocks in a stock exchangei.e Nse and Bse in which you can do derivative trading.

 

 

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