In recent years, the market for financial derivatives has shown a sudden growth. Considering the class of equity derivatives around the globe, a bright future awaits.
Equity Investment helps an individual save money in his/her bank account. Investing in equity derivatives leads to a higher rate of return and increased principal investment. With the help of markets and demanding pressure, returns and befits are increased.
Today there are several share market apps. MoneyControl app ranks the top in share market apps. These apps serve an investor in the following ways:
- Creation of wealth over time
- Protection against inflation
- All-time liquidity service
- Hassle-free trade across exchanges
- Appreciation in dividends and capital investment
- Quick and real-time tracking of equity investments
What is an Equity Derivative?
An equity derivative is a financial instrument established based on equity movements of the hidden asset. A stock is one of the best examples of an equity derivative as the value of a stock is based on the underlying stock price movements.
Equity derivatives are used by investors to safeguard the risk associated with the long and short-term stock positions. Moreover, equity derivatives can be utilized for venturing the price movements of any underlying assets.
Factors affecting the growth of Equity Derivatives :
Over the last few decades, the derivatives market has shown a phenomenal growth rate.
Some of the factors leading to the growth of financial derivatives are:
- Increased volatility in the finance market and asset prices
- Highly integrated national financial markets in collaboration with international markets
- Improved communication practices
- Development of better risk management tools for enhanced risk management
Four products under Equity Derivatives :
Forwards, Futures, Options, and Swaps are the four highly traded products under derivatives.
An agreement between two parties, based on a contract, for purchasing or selling an underlying asset at a fixed future date and a fixed price is defined as Forwards. Forwards are termed as over-the-counter (OTC) products as they lie under private contracts. Forwards aren’t meant to be traded on the exchange platform. Thus, forwards, inequity derivatives are risky and illiquid.
Based on structure, a futures contract resembles a forward contract. The basic difference between forwards and futures is traded on an organized exchange field. It is regulated by SEBI. Make a note that, traded futures are based on sizes and strike prices. Moreover, the futures transactions are guaranteed upon by the stock exchange. Hence it is out of risk.
Options lie under exchange-traded contracts with a slight difference in structural representation. An Option is a contract under Equity Derivatives that offers the right to purchase or sell the underlying stated price. Without an obligation, Options enhance the traded market with a premium.
Swap is a representation of agreement between two parties for exchange cash flows in the future. Swap is based on a pre-arranged formula. With Swap, an individual can carry two basic criteria.
- Exchange fixed rate interest in the return of floating rates or,
- Exchange one currency in return for another.
At present, Swaps are not so popular in Indian markets.