In the eighth episode of the Learn2Trade series, Mr. Vivek Bajaj will provide insights into the fundamentals of derivatives and the advantages and risks implied while trading in futures. He will explain the starting points of derivative contracts and the different types of financial derivatives. Trading in the cash market is excellent for advancing as a novice and is easy to enter with less capital. Nonetheless, it doesn't help in creating colossal cash. This is where the concept of the derivative market comes into the picture. Derivatives are like financial tools crafted from real-world assets, giving traders a chance to protect themselves or take a guess on where the asset's price might go next. He will introduce futures, commodities, and currency and explain the concepts of hedging, leverage, and margin trading. 

Watch the video to comprehend how you might bring in enormous cash with less capital.

What You Will Learn

Trading is an exciting experience, to excel in trading, one needs to continuously upgrade their skillset and stay updated with the latest market trends, says Mr. Bajaj. One such essential concept he discusses in this episode is the concept of derivatives. The idea of derivatives originated from the concept of hedging, which was introduced to reduce the risks faced by farmers. This mechanism laid the foundation for the first derivative contract, called futures. In this contract, both parties agree to buy/sell an asset at a predetermined price on a specified future date. 

Vivek Bajaj explains that Futures and forwards are similar yet distinct contracts. While forwards allow parties to fix the price on any day, futures have a pre-decided delivery date and quoted price set by the exchange. But when derivatives came into play, they tackled issues like unpredictable price swings and defaults by setting up margin money. This margin acts as a security deposit, ensuring that both parties meet their contractual obligations.

Explaining about marginal funding, Vivek Bajaj says when trading in the stock market, just sticking to buying and selling shares for delivery might not always bring in profits. He explains, that intraday trading allows for quick buying and selling, but significant profits often require holding onto stocks for a longer duration, known as swing trading. You will find out that derivatives give traders a bit of a financial boost, letting them take on bigger positions with a limited amount of money. They enable traders to enter the derivative market with a more substantial position, aiming for bigger returns.

He explains futures, commodities, and currency derivatives which offer scope for diversification and the potential for significant gains. But with this potential for reward comes increased risk. Price risk and credit risk are the two primary risks associated with derivatives. While price risk pertains to the fluctuation in the future price of the asset, credit risk deals with the risk of default by the counterparty. To manage these risks, traders need to be watchful and informed, understanding the market dynamics and adjusting their strategies accordingly is very essential.

Throughout this episode, he provides valuable insights, tips, and strategies to help you navigate the derivative market confidently. Whether you're looking to hedge your portfolio, capitalize on market trends, or simply expand your trading horizons, understanding the concept of derivative trading is essentials