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.

What is Technical Analysis Of The Stock Market

Many people enter the stock market without knowing “Technical Analysis” (TA) but if you desire to become an Intraday Trader or daily trading in different stocks you need to get complete knowledge about this.

Read more: What is Technical Analysis Of The Stock Market

If you really want to learn about the “Technical Analysis” of Stocks you are in the correct place.

This analysis is different from Fundamental Analysis (FA), Fundamental Analysis predicts the stock price for further movements and it explains company debts and profits FA includes the details about Balance sheets, EBIDTA, Topline, Bottom line, and Ratios.

This method is completely depending on charts of prices and indicators.

Nevertheless, Technical Analysis is having psychological trading parameters, there is an aggressive trade war between buyers and sellers we need to find who will be going to become the upper hand in that trading.

e Chart in Technical Analysis

A Price Chart is nothing but, created by the price movement of stock in a day or n a week or whatever we need to calculate the high and low values in a period.

In a day if you want to calculate or determine a stock going to bearish or bullish mark every 5 minutes High and Low values similar to Open and Close values.

These values formed a Candle for 5 minutes and all the day during the market is live every 5 minutes candles together formed the chart of the day, similarly, we can form 10, 15, 30, 1hr, 2hr, 4hr, day candle charts

If the candle’s close price is greater than the open price candle will be in green color which we can say is bullish, similarly the close price is less than the open it will be red color which we can say is bearish.

Nowadays we need not calculate our own, since all the stockbroker applications provide free data with a chart environment we just change and analyze with a period.

Chart Patterns in Technical Analysis

Chart patterns play a key role in chart analysis if we are doing day trading most people put all their efforts to catch the pattern of the day.

If they recognized the correct pattern on that day they will enter into a trade, otherwise, they will not trade that day with a failure or non-pattern chart.

Patterns are created in the form of candles if you pick a duration, it can be 1 or 2 hours in a trading day with 5 minutes candles they will form a pattern into some flags, triangles, cups, and head and shoulders, etc. (we mentioned below).

After that pattern has formed, we can see a breakout in price with that pressure of pattern in the time of break out traders entered in to trade in day trading or intraday trading.

 are Indicators? How do they help to trade in Technical Analysis?

Indicators are predicted the next candle price and how it going to be bullish or bearish but not with 100% accuracy.

Moving Averages

Indicators are two types, the first types are Leading Indicators and the other types are Lagging Indicators.

Lagging indicators are calculated and formed by the previous candles. Based on previous candle price movements. Example Moving Averages, RSI, MCAD, etc.

Leading indicators based on price action movements like Pivots, CPR, Fibonacci, etcAll the indicators are behaving with what we give input.

Using Technical Analysis in Different types of trading

Traders will trade in different ways and types for example we have three different types of trading methods.

  • Swing Trading
  • Intraday Trading
  • Scalping Trading

Traders are using Technical Analysis in these three methods only, for investing in the stock market they use Fundamental Analysis.

Swing Trading

Swing trading is nothing but, traders entering into trade and they take delivery or take carrying positions for a month to six months maximum time duration of this stock price will move up or down as expected by Technical Analysis.

If positions or holdings are whether profit or loss they close all the positions in six months or below one year we could not carry the positions for years in “Swing Trading” or “Short Term” trading.

Intraday Trading

When a trade executes and closes on the same day, it is considered as “Intraday Trading”.  In this method of trading, the trader can open short positions in stocks with a leverage amount.

This type of trading method completely depended on Technical Analysis with charts, indicators, and candlestick patterns.

Scalping Trading

Scalping does not need any indicators to trade, they do execute and close trades in fractions of seconds or below a minute.  Scalpers can do trades depending on candlestick patterns.  And they used to trade a huge amount for this trade.

Volume in Technical Analysis

This is the biggest thing in Technical Analysis, volume is inflow, and outflow of the stock (traders enter & trade, traders short & exit) is calculated as volume.

Most of charting software provides many indicators in volume-based analysis like Volume Oscillators, Volume Candles, Net Volume, etc.

The volume makes the stock volatility in a day.

Important of Price Action in Technical Analysis

In this method of analysis, most of the intraday traders prefer Price Action better than indicators.

However, price action is highly accurate and reliable to traders.

Note: Do not depend on other’s analysis when you enter into real trading do your own analysis on stocks.

All the images are sourced from Tradingview.

what is fundamental analysis of a stock and its significance

If you want to become an investor you must have to know “What is fundamental analysis” and its importance in investing, I am letting you know how to do an analysis of company stock.

To start with we need to know how Investors use fundamental analysis to determine the intrinsic value and predict the future value of a company stock.

Read more: what is fundamental analysis of a stock and its significance

Stock prices may not reflect actual stock value. Therefore, stocks may be undervalued or overvalued on the stock market.

To determine the intrinsic value, this is mainly to do an analysis to examine the company’s underlying health.

first of all, analyze both qualitative and quantitative metrics such as company revenues.

In addition, will have to see profit margins and return on equity.

This method is used to identify strong companies to make long-term investments.

To do an analysis of company stock you must have to know about Stock Market.

significance of Fundamental Analysis

This analysis is to be the first step to becoming an investor. It will make all the sense about the company, as it is fundamentally strong or not.  

analysis of fundamentals gives you clear information on how to invest in companies or stocks in the stock market. It helps you to determine the stock’s fair value.

Stock fundamentals can also be used to evaluate the performance and health of an organization using key numbers and economic indicators.

You can predict future price movements and determine if a stock’s value is too high or low by this analysis.

It also helps you analyze a company’s strength, and its ability to beat its competition.

A complete analysis of a company or its stock can help willing to know the business model and working status of the management.

Fundamental analysis is an intellectual move to take a decision about investment in a stock of a company.

reports of Fundamental analysis

To determine the stock’s actual value, investors use many different tools too. These tools are most important include:

Financial Reports

Financial reports are very important such as Balance sheets, Income statements, Cash flow statements, Reserves and surplus, Total Liabilities, and Total assets.

Earnings Reports

Quarterly earnings and projected future earnings.

Earnings will give you companies growth statements in year-on-year earnings and quarterly-based earnings in present-year growth.

Financial Ratios

All the financial ratios like EPS, P/E, ROE, etc., determine stock value more than reports of top-line reports.

Let’s look at an example to show how fundamental analysis can be used to create wealth on the stock market just look at Reliance Industries Ltd.

In the above picture of Reliance Industries, you can see the market capital of the company and dividend yield, face value, book value, ROCE, and ROE by these values you can decide whether this company belongs to large-cap, mid-cap, and small-cap.

How to read fundamental analysis reports of a company?

Image 1.1

In the above (image 1.1) you can see the company’s total market cap is above 20,000 crores which we can say it is large cap stock.

Large-cap stocks have very liquidation, are not volatile, and have consistent compounding growth.

Market capitalization = No. of shares x Current Market Price

Similarly, you can capture the P/E ratio, Book Value, Dividend yield, ROCE, ROE, and Face Value you can learn about these details in further posts.

However, all the Nifty 50 Companies are Large-cap stocks

Balance Sheet Report in fundamental analysis

Image 1.2

A company Balance sheet can clearly show you what is the position of the company’s assets and liabilities.

Many companies post profits every quarter but we do not know behind the company’s debts and loans, assets, and surplus.

We must have to know all details about companies before we invest in those stocks the above image(image 1.2) shows year-wise data of Reliance assets growth.

Profit & Loss Statement in fundamental analysis

Image 1.3

Even large-cap stocks also post losses for some continuous quarters or years which means, if the company performs in bad, we will not get a good profitable income through investing like those stocks.

In the above (image 1.3) you can see Reliance sales, expenses, operating profit, profit before tax, and net profits these are very important while investing to observe.

Ratios Reports in fundamental analysis

Image 1.4

What is Ratios? How important is this analysis ???

Ratios are very reliable data to analyze stock quickly and we can find the value of the stock through the limits of the ratio, if we found ratio data is out of the limits we have it is overvalued.  

Quarterly Results

Image 1.5

We must observe every result of the stock it can be quarterly or yearly the stock becomes very volatile in the results posting time.

Share Holding Pattern in fundamental analysis

Image 1.6

This is very important to know what is the promoter holding percentage in the company if they have confidence in the company or not will know through the shareholding pattern.

And will know by this what is other institutions and investors interested in this as above (image 1.6) shown.

Fundamental analysis is very easy to learn and do practice the stocks in the market you will become a good investor.

All the above images are taken from www.screener.in