Derivative Trading and Equity Trading and the Many Difference

by Rosy Thomas Investment Advisor

Equity Trading

Equity is an asset class. When you buy an Equity share, you are buying a stake in the company. Its value is partially obtained from one or more underlying equity securities. Equity trading is mainly the buying or selling of company stock through one of the major stock exchanges.

An equity trade can be placed by the proprietor of the shares, through a brokerage account, or by hiring an agent. Post the advent of information technology, online stock trading and online share trading can be conducted with a simple click of the mouse or push of a finger using your tablet within the convenience of your home.

The only thing stopping you from placing a trade is simply opening an online trading account. To keep stock market volatility at bay, you could invest in Systematic Equity Plan (SEP). SEP in stocks is similar to SIP in mutual funds. In SEP, you can buy a fixed quantity of shares every month in order to mitigate the impact of market risk.

Derivative Trading

Derivatives possess no independent value. Derivative contract is priced separately based on the underlying asset. The underlying asset for derivative trading could entail index, stock, commodities bullion or currency derivatives.

Following are the different Types of Derivatives:

Futures: The owner is obligated to purchase or sell a contract at a predefined time and price. The conditions implied in this trade are completely standardized.

Forward: The owner is under an obligation to buy or sell a contract at a time and price that has been determined earlier. The conditions of this transaction between the buyer and the seller are customized.

Option: The owner has the alternative to purchase or sell something at a previously identified price and time.

Swap: It is a derivative which is an agreement of barter or exchange of sequence of cash flows.

Options & Futures are derivative contracts whose values are obtained from the worth of the stocks. These contracts have specific expiry dates post which they cease to exist.

By opting for Derivative Trading, you can take a high exposure on a stock or security by paying a small margin. It enables you with cost efficiency and huge time leverage, which acts as a good advantage for traders who carry out margin trading.

Difference between Equity and Derivative Trading

Both equity and derivatives are financial instruments that differ from each other on many levels. The significant similarity between the two is that both of them can be purchased and sold, and there are active equity and derivative markets for such trade.

Equity refers to the capital contributed to a business by its proprietors; which may be through some sort of capital contribution such as the buying of stock.

Derivative is a financial instrument that derives its worth from the activity or performance of one or many underlying assets. The primary difference between derivatives and equity is that equity derives its value on market conditions such as the process of demand and supply and various company-based economic, political, or other activities.

Derivatives can also derive their value from other financial instruments such as bonds, commodities, currencies, etc. There are a few derivatives which obtain their worth from equity such as shares and stocks.