Difference Between Equity Markets and Derivative Markets

difference between equity markets and derivative markets

The Difference between Equity markets and Derivative markets can make sense about how trade is in these two. Performed depending on the price of stocks and both are included with same stock instruments but one gives us delivery for long-term hold other can have expired with the specified date.

Read more: Difference Between Equity Markets and Derivative Markets
  • What is Equity Markets
  • Types of Derivatives performed in markets
  • How Derivative Markets in India
  • Diverse Perspectives on Derivative Markets

What is Equity Markets

Equity markets are financial markets where stocks and other equity securities are bought and sold. These markets essentially provide a platform for companies to raise capital by allotting stocks, and for investors to get buy and sell these stocks in the hope of earning a return on investment. In India, the two major equity markets are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

The BSE was founded in 1875 and is Asia’s oldest stock exchange. The exchange offers a platform for trading in stocks, debt instruments, derivatives like futures and options markets, mutual funds, and exchange-traded funds (ETFs). The NSE was established in 1992 and has emerged as the largest stock exchange in India, accounting for more than 90% of the equity market turnover in the country. The exchange offers to trade in various segments such as equities mean delivered, derivatives mean traded, and debt instruments.

Equity markets in India have evolved significantly over the years, with a growing user base of retail and institutional investors might be domestic or foreign. According to reports from the Securities and Exchange Board of India (SEBI), the total market capitalization of all companies listed on the BSE and NSE was ₹ 230.31 lakh crore as of July 2021. The equity markets in India have been buoyant in recent times, with the BSE Sensex and NSE Nifty50 indices delivering double-digit returns year-to-date as of July 2021.

Despite their popularity, equity markets carry risks and can experience periods of volatility. It is, therefore, crucial for investors to do their research and invest in a diversified manner to mitigate risks.

Equity markets provide investors with an opportunity to invest in stocks of various companies and benefit from their capital growth over the long term. These markets, such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), allow investors to buy or sell listed shares in the form of equity.

In equity markets, investors can choose between two types of transactions: cash delivery or derivatives. Cash delivery involves buying shares outright and carrying out the delivery of the shares. In contrast, derivative transactions involve buying or selling shares based on a contractual obligation to buy or sell the shares at a future date. Derivative contracts are used to manage risks and speculate on the future direction of share prices.

The NSE and BSE are two of the biggest equity markets in India and offer various investment options. In these markets, investors can buy shares for the long term, benefit from capital growth, and earn regular dividend income. These markets are regulated by the Securities and Exchange Board of India (SEBI) to protect investors’ interests and ensure a transparent and fair-trading environment.

Equity markets play a critical role in the economic growth of any country. They provide companies with a means to raise capital and fund their growth. This will create job opportunities and boosts economic development. The equity market allows investors to benefit from the growth potential of companies and earn returns on their investments. For the investment to Equities need t know about Fundamental Analysis

Investing in equity markets requires a long-term perspective. Investors need to evaluate the performance of companies, study market trends, and make well-informed investment decisions. Investing for the long term offers investors the chance to reap the benefits of compounding returns resulting from the growth in a company’s assets and earnings.

In conclusion, equity markets provide investors with an opportunity to invest in the stocks of various companies and benefit from their capital growth over the long term. The NSE and BSE provide a transparent and fair-trading environment for investors, and the regulations provided by SEBI help protect investors’ interests. Investors who invest in the equity markets need to have a long-term view and make well-informed investment decisions based on a company’s performance and future growth potential. With the right strategy of investment, investors can make profits from the growth potential of companies and earn returns on their investments.

What are Derivative Markets?

Types of Derivatives performed in markets

There are several types of derivatives, including futures, options, swaps, and forwards. Futures are contracts that obligate the buyer to purchase an asset at a predetermined price and date in the future. Where options give the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price and date in the future. Swaps are contractual agreements among two parties to exchange cash flows based on different financial instruments. Forwards are contracts that obligate the buyer to purchase an asset at a predetermined price and date in the future, but unlike futures, forwards are not traded on an exchange.

How Derivative Markets in India

In India, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the two main exchanges for trading derivatives. The NSE has a market share of over 90% in the derivative segment. The NSE offers several derivative products including an index of futures, index of options, stock futures, and options.

According to the latest data from the NSE, the average daily turnover in the derivative segment was Rs. 17.31 lakh crore in December 2020. The turnover in the index futures segment was Rs. 4.22 lakh crore, while the turnover in the stock futures segment was Rs. 7.57 lakh crore. The turnover in the index options segment was Rs. 4.87 lakh crore, while the turnover in the stock options segment was Rs. 0.65 lakh crore.

Diverse Perspectives on Derivative Markets

Derivative markets have been a subject of debate among investors, regulators, and policymakers. Supporters argue that derivative markets are providing liquidity, price analysis, and risk-level management tools to market participants. They also argue that derivative markets help in reducing volatility in the underlying asset markets. Derivatives are daily traded scrips and to trade in the derivative markets like futures and options must learn about Technical Analysis.

Critics, on the other hand, argue that derivative markets can lead to excessive speculation, market manipulation, and systemic risk. They also argue that derivative markets can amplify market movements and lead to financial instability.

In conclusion, derivative markets are an important part of the financial system, and they offer several benefits to investors. However, it is important to regulate these markets effectively to prevent excessive speculation and market manipulation. It is also important to monitor these markets closely to prevent systemic risk and financial instability.