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In the stock market or stock market app, f&o trading is quite common. So, are you familiar with this term? Well, f&o trading, also known as Futures and options, are derivative products, meaning they can derive their value from an underlying asset. However, there are few differences in futures and options in fundamental ways.
If you are going to open a demat account anytime, go through this article. This short article will help you to learn about the basics of futures and options. So let’s get started.
The most important function of security markets is to manage the possible risks, that is, Time. So, Time is the biggest risk here because the process changes over Time. Even a highly profitable deal can go down tomorrow.
So, you can understand f&o trading in the context of commodity markets. Options and Futures differ from bonds and shares as they can’t help you earn long-term profits, but they can be used to offset specific risks arising from a constant price change.
Futures and Options (F&O) are agreements to buy and sell assets in the future at certain prices and conditions. Although both options and futures allow the investor to invest in shares or make an investment at a certain price by a certain period, one works very differently from the other. Options are nothing but a contract that gives a right to the investor to buy or sell an asset in the future. The other contract requires a buyer who can purchase the shares and a seller who can sell them on a specific future date.
How to Trade in Options and Futures?
Options and Futures are traded in contracts. It could be one month, two months, or three months. All F&O contracts expire on the last Thursday of the month. Futures trade the price of Futures, which is a bit premium to the spot price owing to the time value, and there is only one fixed futures price for a stock for a contract. For instance, during January 2020, one can trade in January Futures, February Futures, and March Futures of stock X.
Benefits of F&O trading?
One of the most significant benefits of F&O in trading is that you can easily trade without investing in any asset. Here, you don’t even have to invest in any gold item or another commodity, for instance; still, you can enjoy the prices of these commodities.
You can apply the same principle for futures and options on the online trading app in the share market. Here also, you don’t have to invest in any particular asset. Some more advantages of f&o trading are:
- You can transfer the risk to the other person who is ready to accept it
- Opportunity to earn profits with a minimal amount of risk capital
- Comparatively low costs of the transaction
- It also provides liquidity and enables price discovery in any underlying market
Futures and options trading is a good option for traders with short-term investments who can deal with risks. Also, the investment experts suggest that if you are a newcomer, you can go for the equity cash trading segment for some time and then move towards the futures and options segment.
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