Meaning of Derivative in Stock Market

What is Derivative ????

✓ A Derivative is an agreement between buyer and seller for an underlying asset which is to be bought/sold on certain future date for a certain future price.

✓ Derivative does not have any value of its own but its value, in turn, depends on the value of the other physical assets which are called underlying assets.

✓ These underlying assets may be securities, commodities, currency, live stock etc. A derivative emerges out of a contract between two parties.

https://www.proffenzaa.co.in/

Derivative is simply fixing the price of a product which will be bought or sold on certain future

date.

Example

You wish to buy 10gms of gold three months from now for `30,000. You approach one of the gold merchant today and tell him that after three months you will buy 10gms of gold for `30,000 and the merchant agrees to this contract. You are a forward buyer and gold merchant is a forward seller. By entering into this contract you

have secured yourself from the price movement of gold after 3 months. If after three months the price of gold goes up to `35,000 in the open market, the derivative contract will turn profitable and you will end up buying 10gms of gold at `30,000. But if the price after three months goes down to `25,000 you will be at loss on this contract as you will have to buy the gold for `30,000 when the market is going cheaper.