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Trends of Derivative Trading in India
Trading of Derivatives
When derivative trading on the Bombay Stock Exchange crossed the 10 billion Indian rupee mark this November, it called for celebrations. Many would want to ride the wave and contribute to the surge in derivative trading, but experts are calling for caution. As attractive as derivatives may seem, it is important to understand that these should not be used as a financial product. These are meant for leveraging, hedging and speculating. Even if you have the funds to engage in it, you still have to be cautious.
Says Shruti Jain, senior V P, Arihant Securities Ltd: "Problem is when people go beyond their means. You pay a percentage of the total amount as margin, but losses can sometimes go beyond your capacity." A trader might end up eroding all his capital if he holds on to positions for longer than he can afford.
While mutual fund managers and traders of physical commodities can use derivatives to hedge their commodities, for a retail investor sometimes derivatives cannot be that effective. Small and medium entrepreneurs who deal with gold and silver jewellery can use MCX's gold and silver mini contracts. Also for entrepreneurs who dabble in copper, aluminium, lead and steel, MCX's mini contracts are a boon.
These contracts were launched to specifically cater to the price risk management needs of these small and medium businesses. They usually cannot afford a standard gold contract of lkg. They need these contracts to manage changes in raw material costs, which can have pronounced effects on their margins and profitability. According to information provided by MCX-SX, SMEs have low unit consumption, MCX's mini contracts suit the size of their physical operations and eliminate over-hedging. And, in case of bullion, mini contracts are being increasingly used for delivery- based transactions, too.
For a retail investor who wants to experience the thrill that comes with it, apart from good insights and research into the particular derivative, discipline is the key. Says Jain: "Have a stop loss figure in mind. It is just to remind yourself of the loss that you can afford to absorb."
Presentation on Derivatives Introduction
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