Derivatives are financial contracts that derive their value from an underlying asset such as stocks, commodities, currencies etc., and are set between two or more parties, where the value of the derivative is derived from price or value fluctuations of the underlying assets.

Derivatives can be used to hedge a position, speculate on the directional movement of an underlying asset, or leverage holdings.

Derivative trading happens over the counter or via an exchange. Over-the-counter trading works between two private parties and is not regulated by a central authority. Furthermore, as two private parties agree on the contract, it is susceptible to counterparty risk. This risk refers to the possibility or rather the danger of one of the parties defaulting on the derivative contract.

Derivatives are financial contracts that derive their value from an underlying asset. These could be stocks, indices, commodities, currencies, exchange rates, or the rate of interest. These financial instruments help you make profits by betting on the future value of the underlying asset. So, their value is derived from that of the underlying asset. This is why they are called ‘Derivatives’.

The most common derivatives trading instruments in India are futures and options. While futures provide you with the right and obligation to buy or sell the underlying asset at a future date, options give you the right, not the obligation, to buy or sell the underlying asset at a future date. You can enter into four types of trades through futures and options in the derivatives market - buy call, buy put, sell call, sell put.

When you buy a call, or sell a put, it means you expect the price of the underlying asset to increase before the contract execution (read, expiry) date. But, if you buy put or sell call, it means you are certain that the asset's price will tumble soon.

Derivatives trading is quite popular in India for multiple reasons, including ease of entry and exit, minimum investment and gravity-defying profits.