More than one crore futures and options (F&0) traders lost 21.81 lakh crore in F&O during FY22-FY24, according to a Securities and Exchange Board of India (SEBI)
About Futures and Options Trading
- F&O are financial derivatives that derive their value from an underlying asset (such as stocks, indices, commodities, or currencies)
- They are contracts between two parties, where they agree to buy or sell the underlying asset at a predetermined price on a future date.
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About SEBI
- The Securities and Exchange Board of India was constituted as a non-statutory body on April 12, 1988 through a resolution of the Government of India.
- The Securities and Exchange Board of India was established as a statutory body in the year 1992 and the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) came into force on January 30, 1992.
- It is the regulatory body responsible for overseeing India’s securities market.
- Its primary role is to protect the interests of investors, maintain market integrity, and facilitate efficient resource allocation.
- SEBI regulates various market participants, including stock exchanges, brokers, mutual funds, and listed companies, ensuring they adhere to fair and transparent practices.
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What are Derivatives?
- According to SEBI, derivatives are financial contracts that allow investors to buy or sell an asset at a future date.
- They are a leveraged form of trading, which means that investors can buy a large quantity of assets by paying a small amount.
- Common derivatives include futures contracts, forwards, options, and swaps.
- Derivatives can be traded on an exchange or over the counter.
- In India, SEBI regulates the derivative market.
- Derivatives can be used for hedging or speculation.
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Types of Derivatives
- Futures Contract: Agreement to buy or sell the underlying asset at a future date for a predetermined price.
- Obligatory for both parties to fulfill the contract on the agreed-upon date.
- They are subjected to high risk and can reap unlimited profit or loss.
- Less flexible as it’s obligatory.
- Underlying assets include physical commodities and financial instruments (stocks, currencies and bonds etc.)
- Options Contract: Provides the buyer with the right, not the obligation, to buy (call option) or sell (put option) the underlying asset at a predetermined price.
- They carry limited risk and can reap either unlimited profit or loss.
- More flexible as the buyer can choose not to execute.
September 24, 2024
