Basic Terms of Equity Derivative

Equity derivative is a financial class of derivatives whose value can be derived from one or more equity securities. Option and future are one of the most commonly used equity derivative. There are many types of derivative found over the worldwide. Here we are going to discuss a few of them.

1. Stock Option - It is one of the commonly used derivatives by the investor in order to hedge the risk, if a investor is holding a stock option position then he have the right over the stock but not the obligation to sell & buy the assets stock option have liquidity and transparency to work with them. Much care should be taken while trading in option market.
2. Single Stock future (SSF)- It is a contract to deliver a particular stock  during its designated time. The price of SSF is basically depending on price of an underlying stock plus the cost of interest minus its dividend. Trading in SSF require very low margin.
3. Warrants- Warrants are right to purchase a stock over its predetermined date. The price of the stocks here are higher as compared to underlying asset. Unlike stock option warrant price also include time premium.
4. Contract for Difference - An agreement where the seller pay the net amount of current value of the stock & its value. CFDS are available to certain countries such as Germany, Japan, Singapore, Africa, France Canada and United Kingdom. The main advantage CFD is its pricing simplicity 

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Brief detail on Indian stock market

 Indian share market is one of the oldest and finest markets in Asia

Trading in Indian stock market is basically done in two exchanges Bombay stock exchange (BSE) and National stock exchange (NSE)

1. Bombay stock exchange – BSE is one of the oldest stock exchanges in Asian region. It was established on 1875 with the old name as “The Native Share and Stock brokers” under the regulation act of 1965.The index calculation is based on “Free Float market capitalization”.

2. National stock exchange – NSE was established in 1990 as a demutualised electronic      exchange. This exchange uses National Securities Trading system (NSTS) which perform all auction market tasks.

Stock market Index – BSE represents collection of 30 stock samples including representative company. The base year of sensex used is 1978-79 and the base value is 100.On the other hand Nse include 50 stock indexes accounting for 24 sectors of economy.

Trading Mechanism

Trading at both exchanges is carried out through an open electronic limit order book, where order matching is done with the help of trading computer, no market makers and specialist included and the entire process is carried out automatically as order-driven which state that order placed by an investor will automatically matched with  best limit order.

Market Regulation

The regulation of stock market is done by the Securities and Exchange Board of India (SEBI) which was found in 1992 as an independent authority.

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