Frequently Asked Questions
Get to know the basics!
Curious minds are gifts. So here we have collected some basic knowledge about Derivatives, Derivative Trading, their advantages and much more, so that you start out with the bases covered. However, if you remain dubious about how this trade works, we are hands-on to clarify any further questions.
1. What are Demat and Trading accounts?
In India, shares and securities are held electronically in a dematerialized (or "Demat") account, instead of the investor taking physical possession of certificates. A Demat account is opened by the investor while registering with an investment broker (or sub-broker).
A trading account is used to place buy or sell orders in the stock market. The demat account is used as a bank where shares bought are deposited in, and where shares sold are taken from.
2. How to earn extra returns from existing investments?
Lot of investors makes long term investments by keeping money in assets like Shares, Mutual Funds, Fixed Deposit, and Property etc. They can use these investments to earn extra income by using Derivative products.
Lot of long term investors buys shares and mutual funds thinking that they can make good returns. These securities will be in their demat account for so many years. They may receive dividend if declared from shares and mutual funds. Normally dividend yield is not that high.
Example: A long term investor bought shares worth as 20 lakh in January 2014. He received 60000 Rs dividend in 2014. Dividend yield is 3% which is below the risk free rate of 8%.
During this one year, there would have been lot of movements in the markets in both directions. There are a lot of opportunities in the market to make extra money. Normally long term investor never gets involved due to fear factor, lack of fresh fund etc.
Can an investor make extra money from existing share / mutual fund / Property investments without raising extra fund, without taking big risk?
The answer is ‘YES’. But how it can be done?
3. What are Derivatives?
A derivative is a financial product with a price that is depended upon or derived from one or more underlying assets.
The derivative itself is a contract between two or more parties based upon the asset or assets.
Its value is determined by the fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rate and market indexes.
4. What is Derivative Trading?
For derivative Investment, investors can use existing investments and not necessarily look for fresh capital.
Because the investor makes derivative investment through NSE (National Stock Exchange); the biggest stock exchange in India - there will not be any counter party default risk.
Derivative trading offers better returns compared to normal share trading. To buy derivative trades, there is no need to pay the full amount for the positions; it only requires keeping margin amount which is normally a third of the full amount of the positions. As investors are required to keep only the margin, more positions can be bought which increases the returns.
To take positions using derivatives, investors just need to provide Margins. It can be in the form of Cash, Shares, Mutual funds, Bank Guarantee etc. An investor, who got shares / mutual funds with him, can provide these securities as margins. So there is no need to raise fresh cash.
Note: Margin is the amount exchange collects from investors to prevent any of the parties from defaulting on his trade commitment.
5. What are Equity Derivatives?
Equity Derivatives are financial products where the value is derived from underlying equities and indexes.
There are different equity derivative products which are given below.
- Stock Futures
- Index Futures
- Stock Options
- Index Options
6. What are Currency Derivatives?
Currency derivatives are financial products where the values of these products are derived from underlying currency.
7. What are the advantages of using Derivatives?
The Derivative investments on blue chip companies in India reduces risk.
All positions are well protected. For example: Investment is done on India’s top IT company Tata Consultancy Service (TCS) at 2500. Protections will be taken at 2400, so in this case maximum risk is less than 5% (100, the difference between 2500 & 2400).
8. How much is the expected return?
The Expected return from Derivative Investment is 20+% per year.
9. What are the risks of Derivative Trading?
Derivatives provide excellent tools for risk Management. Here Investor can buy protections against the market volatility. It’s like buying insurance for our car against accidents. Investors buy protections for their investment by paying a premium. Once the investor gets protections the investment risk are limited.
10. What is the process of starting Derivative Trading?
Investor opens a derivative trading and demats account with “NAMindex”, which is the business partner of Religare Securities.
Investors keep his shares / mutual funds in this demat account.
In case of Bank Guarantee, investors take the bank guarantee in the name of ‘Religare Securities’.
Trading profit is transferred to investor bank account monthly.
Investor can log in to trading account and down load positions report, transaction report etc.
From trading account, fund can be transferred only to investor’s account.