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Understanding trading in F&O
Generally, we trade in equity, commodities, currency, future and options.
Generally, we trade in equity, commodities, currency, future and options. Let us look into the basic difference between these.
Equity is commonly called as a stock or share. Equities are part of respective companies. In equity you can only buy and make money. You can buy a stock and hold it for unlimited period of time. If market goes down, you lose and if it rises you gain.
You can buy as many shares as per your finances available with you. You can sell partial quantity from your holding or add more if you desire. In equities you can only short sell for intraday, but you cannot have a position.
Futures and options have been designed for hedging purpose. They are not physical shares. Futures and options are derivatives.
Future is a contract and you can sell and buy futures. You can buy and sell futures and hold as well for maximum of 90 days only. In future you don't get to buy one quantity, but it is generally bought in lots. Future are designed to buy in fixed lots.
For example, when you trade in Nifty the lot size is 75 and for Bank Nifty it is 20 and for SBI it is 3000. Future price of a stock is based on its equity price. Future price is the available on discount and on premium depending on volume and number of days to expiry.
Futures are now used for short term trading also. Futures are contracts so you don't need to pay entire quantity amount for buying and selling. One cannot sell partial quantity and one has to buy and sell full lot.
Future can be identified as near month, (same) next and far. In other words, future is valid from the current month to the next and the far month. It expires on the last Thursday of each month.
Futures are owned and managed by NSE. Generally future lot is available at 50,000 for intraday and around 2 lakh for deliveries irrespective of their quantity.
Options are not physical shares and are known as derivatives. Options are contracts. One can sell and buy options and can hold for 90 days. Options and future lots are same.
Options are owned by traders and managed by NSE. Options expire on the last Thursday of each month. In options also one has to buy and sell full lot. One can buy a call or a put option and similarly can also sell a call and put option.
(The author is a homemaker who dabbles in stock market investments in free time)
