derivatives
http://www.equitymaster.com/detail.asp?date=12/11/2003&story=1&title=Your-perception-of-derivatives-instrument-is
With an assortment of investment instruments available in the financial markets, derivatives have caught the attention of investors and their volumes are on the rise. However, since this market is relatively more complicated than the cash market awareness and participation continues to be low as far as retail investors are concerned. Therefore, in order to know as to what an average investor feels about derivatives we conducted a poll and the question asked was, "As an investor, what is your perception about derivative instruments" and the results were as follows.
Out of the total respondents, 47% voters believe that derivative contracts are just speculation medium, 31% believe it's a hedging tool and 22% believe that it allows one to take higher exposure than cash markets with equivalent initial cash outgo. We shall now briefly discuss the advantages (if any) and the disadvantages of each of the above three means.
Speculation medium:
It is strange to know that 47% of the voters believe that derivative instruments are just speculative tools. Speculators can take position in the markets betting on either prices of stocks will go up or come down through derivative contracts. Derivatives if used to speculate can prove extremely dangerous, especially in the futures market, as the person's exposure is already much higher as compared to cash markets because one has to pay just the margin money. Lets take a hypothetical example; say stock A, which currently trades at Rs 1000. The margin money on the same will be around 25%. So the person can take a exposure which is equal to 4 times his potential exposure in cash markets. Now in such a situation, if his predictions for the stock goes wrong, his pay out will also increase by 4 times. However, if one is dealing in options, then the situation differs. If a person is speculating by buying an option, the
With an assortment of investment instruments available in the financial markets, derivatives have caught the attention of investors and their volumes are on the rise. However, since this market is relatively more complicated than the cash market awareness and participation continues to be low as far as retail investors are concerned. Therefore, in order to know as to what an average investor feels about derivatives we conducted a poll and the question asked was, "As an investor, what is your perception about derivative instruments" and the results were as follows.
Out of the total respondents, 47% voters believe that derivative contracts are just speculation medium, 31% believe it's a hedging tool and 22% believe that it allows one to take higher exposure than cash markets with equivalent initial cash outgo. We shall now briefly discuss the advantages (if any) and the disadvantages of each of the above three means.
Speculation medium:
It is strange to know that 47% of the voters believe that derivative instruments are just speculative tools. Speculators can take position in the markets betting on either prices of stocks will go up or come down through derivative contracts. Derivatives if used to speculate can prove extremely dangerous, especially in the futures market, as the person's exposure is already much higher as compared to cash markets because one has to pay just the margin money. Lets take a hypothetical example; say stock A, which currently trades at Rs 1000. The margin money on the same will be around 25%. So the person can take a exposure which is equal to 4 times his potential exposure in cash markets. Now in such a situation, if his predictions for the stock goes wrong, his pay out will also increase by 4 times. However, if one is dealing in options, then the situation differs. If a person is speculating by buying an option, the