How to Invest ! : Hello everyone !
I am presenting in front of you the series called How to Invest. In this series I would help you to understand the basics of the stock market.
I want to see you all as good Investor. Lets begin the ride towards the success. How to Invest !
Future contracts : A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price. Future contracts
Characteristics of Future : When you open a futures contract, the futures exchange will state a minimum amount of money that you must deposit into your account.
This original deposit of money is called the initial margin.
The minimum-level margin is determined by the futures exchange and is usually 5% to 10% of the futures contract. Characteristics of Future
Characteristics of Future : Leverage - In the futures market, leverage refers to having control over large cash amounts of commodities with comparatively small levels of capital.
In other words, with a relatively small amount of cash, you can enter into a futures contract that is worth much more than you initially have to pay Characteristics of Future
Characteristics of Future : The profits and losses of a futures contract depend on the daily movements of the market for that contract and are calculated on a daily basis.
Speculators in the futures market can use different strategies to take advantage of rising and declining prices. The most common are known as going long, going short and spreads. Characteristics of Future
Option contract : An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.
An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties. Option contract
Characteristics of Option : Option premium – This is the price paid by the buyer to the seller to acquire the right to buy or sell.
Strike or exercise price – The strike or exercise price of an option is the specified price of the underlying asset at the which the same can be bought or sold if the option buyer exercise his right to buy/sell on or before expiration date. Characteristics of Option
Characteristics of Option : Expiration date – the date on which the option expire is known as expiration date. On expiration date, either the option is exercised or it expires worthless.
Exercise date – Is the date on which the option is actually exercised.
Open interest – The total number of options outstanding in the market at given point. Characteristics of Option
Characteristics of option : Call option - A call option gives the holder the right to buy specified quantity of the underlying asset at the strike price on or before expiration date.
Put option – A put option gives the holder the right to sell specified quantity of the underlying asset at the strike price on or before a expiry date. Characteristics of option
Comparison : You have to pay premium to acquire right of option contract.
Risk percentage is less because your loss only limit to the extent of the premium. When your loss equal your premium your contract expires. You don’t have to pay any premium in future contract.
Risk is very high because of the high leverage. You enter with a small amount into the contract which is worth much more. Comparison
Conclusion : It is important to know that future contract is not for everyone because of high risk involved.
Option contract much safer because your risk only limited to the extent of premium.
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