Open a Derivatives
Trading Account

While the diversity in investment avenues has led to more individuals experimenting with regulated and unregulated opportunities, derivatives are one of the few instruments that have stood the test of time.

You must be familiar with the traditional investment opportunities revolving around the trifecta of real estate, gold, and fixed deposits. However, these were popularised when investors were unaware of additional options or had no easy access to them.

For instance, derivatives trading in India was a much more complex process, requiring you to call the broker whenever you wanted to buy or sell certain derivatives in the market.

However, the advent of technology and the popularity of the world wide web led to the creation of several online brokerage firms like Choice India. These platforms have streamlined and simplified the trading process, enabling you to execute trades at the touch of a button.

But it is crucial to dive into the concept's roots to gain a comprehensive understanding of the derivatives market and the intricacies of a derivatives trading account.

What is Derivatives Trading?

Derivatives are short-term financial instruments whose value depends and varies according to the underlying asset. These assets can include stocks, indices, currencies, exchange rates, interest rates, or commodities. Hence, derivatives trading means buying and selling these financial instruments on a standardised exchange.

Derivatives do not count on the market's sentiments but a change in value depending on fluctuations in the underlying assets. As such, derivatives trading can be synonymous with significant profits in the best-case scenario.

Unsurprisingly, derivatives trading is more accessible to standard retail investors due to the advent of several online brokerage platforms. All you need to do is open a Demat account with a reputed online brokerage platform like Choice India to transition seamlessly into your derivatives trading journey!

Types of Derivatives Trading

Derivatives trading is associated with four major types of contracts.

• Options: Entering into an options contract grants rights to the buyer to buy or sell an underlying asset at a fixed price before a predetermined date. However, they have no obligation to do so.
• Forward: Famous for customisable contracts, forwards involve a binding derivatives contract between two parties to buy or sell a particular asset at a given date. However, it is a private agreement that does not involve exchanges.
• Futures: Similar to forwards, futures comprise standardised terms, and the trade occurs on an exchange.
• Swaps: As the name suggests, swaps involve the trade of cash flows from varying financial instruments based on mutual agreement between two parties.

Is the Derivatives Trading Market Regulated?

The trading of derivatives is regulated by a standardised body called the Securities and Exchange Board of India (SEBI), which functions under the Ministry of Finance. It is the bonafide regulating body for derivatives and equity, with a responsibility to eliminate chaos in the market with stringent regulations.

However, SEBI is merely a regulation body, which raises the question: What is a derivatives trading exchange?

Think of an exchange like a marketplace, where several commodities, stocks, and other assets are sold in the form of derivatives. India consists of different exchanges, each catering to a different purpose.

National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the exchanges used for trading equity and index derivatives. At the same time, the Multi Commodity Exchange is the go-to place for trading commodities like metals and agricultural raw materials.

What are the Charges Associated with Derivatives Trading?

The entirety of derivatives trading involves the following charges.

• Brokerage charges: Similar to how agents require a commission, brokerage charges cover the platform's fee that facilitates derivatives trading. However, these charges are usually nominal.
• Transaction charges: These are levied according to the type of derivatives trading chosen by the user. For instance, futures contracts attract a different transaction fee than options.
• SEBI turnover charges: Usually, SEBI charges Rs 0.1 per lakh as a standard fee.
• Stamp duty: A uniform charge imposed on issuing, selling, or transferring the derivatives.

Depending on the type of derivatives trading, you might also incur securities transaction tax (STT), and clearing member (CM) charges on your derivatives.

How to Choose the Best Derivatives Trading Platform in India?

Before committing to a particular derivatives trading broker, here are some factors you must consider.

• Accessibility: Browse through the platform and check the ease of reaching from point A to point B. If the interface is user-friendly, with well-placed elements distributed throughout the page, it might provide a seamless trading experience.
• Rapid order placement: Derivatives are subject to constant price fluctuations. Hence, it is vital to execute the order immediately when you notice an increase or decrease in price. Ensure that the trading platform has well-segregated features that simplify the order-placing process.
• Trading tools: Various online brokers provide free resources like online research advisories and 24/7 customer support to ease your transition into the derivatives trading segment. Look out for these tools and choose the platform providing the most value.

Including these elements is sufficient for a brokerage platform to be considered one of the best derivatives trading platforms in India.

How to Trade with a Derivatives Account?

After you have opened a derivatives trading account in India with a reputed online broker, it is finally time to experience the market by making your first derivatives trade. Here are some steps that will help make the process easier.

• Conduct preliminary research on the instrument suitable for your long-term or short-term goals
• Deposit some funds and check if derivatives trading is activated on your account. In case it is not, contact your broker immediately.
• It is finally time to choose your stocks! Pick out your choice while accounting for factors like funds in hand, margin requirements, and the price of both the underlying assets and the contract.
• Purchase the contract with a minor amount and wait for it to expire before settling it. Alternatively, you can pay the whole amount without waiting or choose to join an opposing trade.
• The likelihood of profit or loss depends on the contract's price when the expiration period is up.

What is the Derivatives Trading Time in India?

The derivatives trading time in India mirrors the standard time for stocks and other assets. NSE and other exchanges begin the trading day at 9:15 AM and close the window at 3:30 PM.

These timings are only followed on the weekdays, i.e. from Monday to Friday. The exchanges remain closed on the weekend, so it is impossible to perform any trades. However, you can still transfer funds into your account, but they will be reflected when the next trading day begins.

What are the Documents Required to Open a Derivatives Trading Account in India?

Opening a derivatives trading account in India necessitates some mandatory documents.

• Residence proof like driver's licence, voting ID, or other official supporting documents listing your address
• A Know Your Customer (KYC) form
• Risk disclosure document with your signature
• Two passport-size photographs (must be recent)
• Bank account proof documents (bank statement, first page of the passbook, or a cancelled check)
• Government of India - issued Identity proof like pan card, passport or aadhar
• Copy of tax returns and salary slips
• Bank statement (only of the last six months)

All in all, derivatives trading offers you the option to diverge from traditional investment avenues and diversify your revenue sources. So, in order to begin your trading journey, you need a Demat account. Open a free Demat account on Choice India now to avail yourself of attractive offers and make your derivatives trading journey easier!