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Stock Derivatives |
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Stock derivatives are essentially a bet. Stock derivatives are any monetary claims which have a price. The value is dependent on the worth of the stock.
The two main options which are associated with stock derivatives are future and options. The concept of futures was initially introduced as an insurance procedure for manufacturers and farmers who wanted to settle a cost for crops at a future date. The farmers felt the need to know the amount he would get for his crops.
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This prior knowledge about the amount of rupees he is expected to get would help him to make plans for the future. Thus the farmers were benefited. In respect of the manufacturer, it can be said that this concept helped them to ensure a consistent
price they would charge.
The concept of options also existed for many years. It was prevalent for along time. The theory and concept behind options were available for many centuries. It traces its source to the times when the law of contract was at a development stage. It can be said that the concept of options were available from the medieval times. For a long time, the concept and idea of options were used in trade and commerce. It was a simple but necessary tool which helped in business. For several centuries, the concept of options was used to carry on trade in fields such as imports, agricultural products and manufactured products.
A futures contract is a standard agreement which is traded on a futures exchange. By the help of futures contract you can buy or sell a stock at a certain price in the future. The future date is termed as final settlement date or delivery date.
An options contract on the other hand, provides you the right to be engaged in future transaction. However, there is no obligation. An options contract is again divided into two types – call option and put option.
Futures and options are very useful tools. These are products which can bring a huge change in your investment activity and also in your trading. These tools will not only help you to increase your profit but will also assist you to control the risks which are usually associated with stock market and stock trading.
The idea of futures and options are jointly known as derivatives. Derivatives, like futures and options, are a type of financial device whose price fluctuations and price movements results from the price variation of an underlying security or asset. They usually take the shape of contracts. The parties abide by the contract and agree to payments involving them based upon the price of an underlying asset or additional data at a certain point in time. Derivatives are usually divided into variety of types. Other than stock derivatives, commodities, bonds, exchange rates, interest rates are the different types of derivatives. This division is based on the basis of assets.
Though futures and options are the main types of derivatives, yet there are other derivatives which are also available. Forwards and swaps are the other two varieties of derivatives.
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