What is F&O and MCX Trading? - Meaning & Features | Espresso

What is F&O and MCX Trading?

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.

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Here, we’ll take a look at the features and benefits of both F&O and MCX trading.

First Things First: What is a Derivative?

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.

F&O Trading Meaning

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

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.

Here are the main features of F&O trading:

  • It is among the most popular forms of trading in India.
  • The contract entails the date, price, and lot size of the transaction, which are all fixed.
  • To ensure the completion of the contract, you will first have to pay a margin to the broker. Only then can you take a buy or sell position with respect to a future.
  • Unlike shares, derivatives come with an expiry date that is known to the traders in advance. If the seller fails to square off their position before that date, the contract expires.
  • Since the transactions are settled in cash, you don’t need a DEMAT account for F&O trading.

MCX Trading Meaning

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.
Know more about NSE & BSE

Here are the main features of MCX trading:

  • Trading in commodities can help you diversify your portfolio, giving you the potential to increase your profits and decrease your risks.
  • MCX follows a transparent, organized structure when it comes to trading volumes and changes in prices, allowing you to make more educated decisions.
  • You can trade in hard commodities like oil or gold or soft commodities like agricultural products.
    Also Read: Agri Commodity Trading

 

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Frequently Asked Questions

MCX trading allows you to trade in commodity derivatives like agricultural products, oils, gold, valuable metals, energy, etc. Since India is a popular market for various commodities, especially gold and silver, it is a good idea to add this type of trading to your portfolio.

 

No, you do not need a Demat account for either. You’ll need a commodity trading account for MCX trading with a broker recognized by the MCX or NCDEX in India.

Yes, you cannot trade in futures and options without a trading account. More specifically, you will require a derivatives trading account that is focused on buying and selling derivatives.

F&O trading means to trade in futures and options, which are types of derivatives. The biggest advantage of this kind of trading is that you don’t need to spend the whole capital on the underlying asset. You take a buy or sell position by paying an initial margin to the broker.