If you know what derivatives are, you must have come across the term Futures and Options several times. What you may not know is the exact meaning of F&O trading or how the whole thing works. Another concept connected to derivatives is MCX or Multi Commodity Exchange of India Limited.
Published on 06 February 2023
Here, we’ll take a look at the features and benefits of both F&O and MCX trading.
Like stocks, bonds, and debentures, derivatives are financial instruments. They derive value from an underlying asset, which can be anything from stocks and bonds to interest rates, currencies, commodities, and market indexes.
Futures and options are essentially two types of derivatives that can be traded on the stock exchange. In the same vein, commodity derivatives are also a type of investment tool that facilitates profit-making from specific commodities without actually owning them. More about this when we look at MCX trading.
Futures and options are both derivative financial contracts between two parties, aka buyer and seller. They are signed by the parties for trading stock assets at a predetermined future date and price. However, these two contracts work in different ways.
Also Read: Everything You Need to Know About F&O Stocks
A futures contract initiates a transaction between the buyer and seller in the future at a price that has been locked down. Once you enter into the contract, both you and the other party have an obligation to fulfil it. If your market prediction turns out to be correct and you profit from your purchase, the seller must follow through on it, and vice versa.
On the other hand, options trading also involves a contract, but it does not oblige the parties to honour that contract. Rather, it gives you the right to buy or sell specific assets on a predetermined date at a set price. If you decide to follow through, it’s called exercising an option. This lack of obligation is what separates a future trade from an options trade.
Therefore, F&O trading allows you to trade in different futures and options. It lets you buy or sell a stock in the present and pay or earn in the future, effectively implying that you can buy more shares even if you have less capital.
As the name implies, the Multi Commodity Exchange of India Limited is the first-of-its-kind commodity derivatives exchange in India that permits you to trade in commodity derivatives. These commodities may include valuable metals, agricultural commodities, energy, oils, spices, etc. Falling in the purview of SEBI since 2003, MCX operates similarly to the Bombay or National Stock Exchanges.
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