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Rajat is new to share market investments & wants to know more about derivatives.
Derivative, is a contract between two or more people that entails speculating on the price of a certain underlying asset on a future date. Know more about What are Equity Derivatives?
Let’s say, Rajat feels, the shares of Zen Infra, currently priced at Rs. 100 is set to rise considerably in 1 month. However, Amit, who owns some shares of Zen Infra, is expecting the price to fall.
So, Rajat & Amit enter into a contract by which Rajat has to buy & Amit has to sell the Zen Infra shares at an agreed price of say Rs. 110 after 30 days, irrespective of the market-price.
The contract between Rajat & Amit is a derivative. It allows Rajat to make profit by speculating and provides Amit protection from incurring heavy losses.
Futures and options are two common types of derivatives.