What are futures and options? Understand before investing
Through futures and options, money can be earned by trading not only in shares, but also in many other segments including gold, silver and agriculture
Everyone wants to earn profit from their investment. There are many options available in the market for investing. Today we will talk about financial instruments known as futures and options. Through futures and options, money can be earned by trading not only in shares, but also in many other derivatives segments including gold, silver, agricultural commodities and crude oil. Before understanding futures and options, it is important to understand the market in which these products are bought and sold. Both of these products are traded in the derivatives market.
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What are derivatives?
Derivatives are financial instruments that derive their value from an underlying asset or benchmark. For example, stocks, bonds, currency, commodities and market indices are common assets used in derivatives. The price of the underlying asset varies according to the market conditions. There are mainly four types of derivatives contracts – futures, forwards, options and swaps.
What is a futures contract?
Under a futures contract, a client can buy or sell an asset at a predetermined price at a specified future date. Both the parties trading in futures are obliged to fulfil the contract. These contracts are traded on the stock exchange. The value of a futures contract fluctuates with the market until the contract expires.
What is an options contract?
Options are another type of derivative contract that gives the client the right to buy or sell an underlying asset at a specified future price, but there is no obligation to buy or sell shares on that date. In this situation, he can exit the options contract at any time if necessary, but this is not possible in the case of a futures contract. You have to fulfill the contract at the time of futures delivery. There are two types of options. The first is call option and the second is put option. A call option gives the right to buy an asset while a put option gives the right to sell.
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