Partner With Us NRI

Open Free Demat Account Online with ICICIDIRECT

What is the Meaning of Derivatives Trading in Stock Market?


Derivatives as financial instruments depend upon underlying assets for their value. These instruments have been traded in markets throughout the ages. The history of Derivatives trading has step by step evolved in range and complexity, laying down what would become the foundation of the modern trade in Derivatives that started in the 1970s.

What is Derivative trading?

  • Derivative trading is the purchase or sale of Derivatives in the share market.
  • Trading in Derivatives revolves around the agreement between the trading parties to trade Derivatives in future for a predetermined price.
  • Derivative trading usually happens according to the business hours of the share market.

What are the requirements for Derivatives trading?

While trading in Derivatives is similar to other kinds of trading, there are some requirements that traders must fulfil before they can begin trading in Derivatives:

  • Traders are required to have an active demat account which is the account that stores securities in digital format.
  • Traders must have a trading account through which the actual trade is conducted. The trading account is linked to the demat account and acts as the trader's identity in the share market.
  • Traders must deposit and maintain a fund which is a percentage of the total value of the underlying asset and the calculated price fluctuations. This process is called margin maintenance, and traders must do so daily as per price fluctuations.

Participants of Derivative Trading

Not all traders participate in the trade of Derivatives trading for the same reasons. Based on their goals, traders participating in Derivative trading can be broadly categorised into the following:

  • Hedgers are risk-averse traders who trade in Derivatives to protect themselves from price fluctuations. They do so by fixing the price of an underlying asset and transferring risk associated with price fluctuations to risk-oriented speculators.
  • Speculators are risk-oriented traders who take risks from Hedgers to profit from price fluctuations. They form an essential source of liquidity to the share markets.
  • Arbitrageurs are low-risk traders who attempt to profit by selling the same asset for two different prices in two other markets.

Benefits of Derivative trading

Trading in Derivatives presents different benefits that can meet the needs of various investors:

  • Trading in Derivatives involves lower transaction costs than in other forms of trading as the Derivatives act as risk management tools.
  • Derivative trading can be a valuable tool for protection against price fluctuations as such fluctuations are already factored into contracts.
  • Trading in Derivatives allows investors arbitrage opportunities to gain higher profits through speculations on price differences and fluctuations in different markets.

Drawbacks of Derivative Trading

While trading in Derivatives presents significant benefits to traders, they also have significant drawbacks which must be navigated for a successful trade:

  • Derivatives are susceptible to price fluctuations, which can lead to severe loss if not managed properly.
  • Contracts in Derivatives trading are challenging to break before expiration, which leaves traders vulnerable to market uncertainty.
  • Trading in Derivatives requires extensive knowledge of complex processes of the financial markets, which makes it restrictive.


Derivative trading represents the more complex segments of financial trade, requiring expert knowledge and skill in gauging probability. While such requirements might deter some investors, others have embraced this particular class of trade, eager to take advantage of its opportunity. The digital nature of such trade makes it likely that it will continue to grow in the future as technology keeps advancing.


ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.

Most Popular

  • 13 May 2022
  • ICICI Securities

The Five-Point Financial Planning Checklist For Your Family

Whether you just got married or planning to have a baby or have dependents, you should have financial plans for every stage in your life to ensure a secured future for your family members. Here are five things you can do financially for your family.   

  • 12 May 2022
  • ICICI Securities

What is a Zero Coupon Bond?

You get fixed returns in the form of interest until maturity when you invest in a bond. Zero-coupon bonds work a little differently. In this article, find out what zero-coupon bonds are, their advantages and whether you should invest in them. 

  • 12 May 2022
  • ICICI Securities

What are Cross Currency Pairs?

The forex market is the largest financial market globally. Currency trading is a lucrative and booming business. While most currencies trading happens in relation to the US Dollar, some don’t. That forms the basis of cross currency pairs. Here’s what you need to know about it. 

  • 12 May 2022
  • ICICI Securities

Investing principles from Benjamin Graham: The Father of Value Investing

Benjamin Graham was a British born economist, professor, and investor who taught at Columbia University. He was also a mentor to some of the most famous investors of the 20th century, including Irving Khan, John Templeton, & Warren Buffett. Buffett called him "the second most influential figure in his life, only after my father". 

  • 12 May 2022
  • ICICI Securities

How to Invest in Nifty 50?

The Nifty 50 is the benchmark index of the National Stock Exchange. It represents the 50 largest companies listed in India. Investing in the Nifty 50 can be a good idea for those looking to make index-linked returns. Here’s how you can invest in the index. 

  • 12 May 2022
  • ICICI Securities

Investment philosophy of Cathie Wood: The most powerful woman on Wall Street

Catherine Duddy Wood, also called Cathie Wood, is an investor who primarily invests in disruptive technologies and is the founder, chief executive officer, and chief investment officer of ARK Investment Management, LLC, an investment management firm mostly active in the United States.

  • 11 May 2022
  • ICICI Securities

How to Use Technology to Improve Your Finances

Technology has made life simpler for everyone. In the realm of personal finance, technology has streamlined many processes—from budgeting to automating your payments. On National Technology Day, let’s look at how technology has transformed our finances. 

  • 11 May 2022
  • ICICI Securities

How to Invest in your Every Goal with Mutual Funds?

Each of us is unique. We have different needs and goals in life. Some of us can ride along swinging markets, while some may need a relatively conservative investment tool. 

  • 11 May 2022
  • ICICI Securities

Four Reasons Why Entrepreneurs should Invest in Equity Mutual Funds

Equity mutual funds provide growth opportunities not just for individual investors but also for entrepreneurs and corporates. They make excellent investments for anyone looking for wealth creation. This article will give you four reasons why businesspeople should consider investing in equity mutual funds.