What is F&O:
F&O or Future and Option is represented as derivatives of the stock market. These derivative are the financial instruments that obtain their value from fundamentals such as currencies, gold, or the share of the company. Those who deal with the F&O market will be concerned about the fluctuation of price. since fluctuation in price mean losses or profit. A derivative is a contract that derives its value from underlying assets like commodities, gold, currencies, etc.
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What is Future:
Future Contract is a type of derivative where a buyer or seller agrees to buy or sell a certain quantity of a particular share or assets, at a specific price at a future date.
for example, you bought a future contract for buying 1000 shares of company XYZ at ₹100 each at a specific date. At the expiry of the contract, you need to buy those Shares at ₹100. Irrespective of the current stock price. If the price goes up to ₹200, you will get the share at ₹100 each. Which means you make a profit of ₹1,00,000. If the share price fall to ₹50, you will still need to buy them at ₹100 each in case you making a loss of ₹50,000.
Future Contract is not only available in Stock, but you can also get a future contract on commodities, Petroleum, gold, Currency, etc.
What is Option:
Another type of derivative is an option contract. It is different from a future contract. An options contract gives the buyer or seller the right to buy or sell a particular asset at a certain price at a fixed date.
There are two types of option namely:
Call Option:
A call option is a contract that gives the buyer the right to buy a particular asset at a specified price on a specific date.
For example, let say you purchase a call option to buy 1000 share of Company XYZ of ₹100 each at a certain date. But the share price fall to ₹50 at the end of the expiry period, and you have no interest in this contract because you make a loss of ₹50,000. You then have the right not to buy the share for ₹100 hence instead of losing ₹50,000 on the contract, your only loss will be the premium that you paid to enter the contract, which will be much lower.
Put Option:
In this type of contract, you can sell assets at an agreed price in the future. For example, you purchase a put option to sell 1000 share of company XYZ at ₹50 on a future date but share price rises to ₹100 before the expiry date and you have the right to not selling the share for ₹100 so you can avoid the loss of ₹50,000.
How to Trade-In F&O:
Like share Trade in the stock market and exchanges, F&O are also traded in Indian Stock Exchanges. This option was introduced in Indian Stock Exchanges in the year 2000. If you want to trade in F&O you need a Trading Account or derivative Account. There are Many Discount Broker That gives you a free trading account and the option to trade in F&O (Click here To know).
In the below you will know how F&O Works:
Let say, Company A who's stock is listed under F&O is releasing their result on next week. A expect the share price will be increased from ₹100 to ₹120. Thereby, he purchases the Contract of Company A for ₹100. When Company A declares the result next week, The stock price has risen to ₹120. That means the buyer makes ₹20 profit per share. Basically, he is not put the entire amount on the contract but the portion of it i,e 12% to 15% per trade. Let say, 100 shares in lot A and the buyer put 12% of ₹10,000 (100×100) i,e ₹1200. If the share price increases to ₹120 he makes a profit of ₹2000 and if price fall to ₹90 the buyer makes the loss of ₹1000.
Future and Options trading is for that trader's who looking at the short term and have tolerance of risk. Many financial experts suggest that the Beginner could start trading in equity cash Segments for a while before move on to the F&O segments. Trading in F&O is not rocket science, you just need a right Broker house and access to research and advise.
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