Types of Derivatives
- 6 min read
Why rely only on traditional trading when you can speculate on price movements, hedge risks, and enhance your portfolio returns? Derivatives offer these advantages and more. In 2025 alone, over 10.8 million traders participated in derivative trading, highlighting its growing popularity.
Before you start investing, it’s important to understand the four main types of derivatives: futures, options, swaps, and forward contracts. Each serves a unique purpose and comes with its risk-reward profile. Read this blog to explore these types in detail and make informed trading decisions.
What are Derivatives?
Derivatives are essentially financial contracts between two or more parties, and you can invest in such an instrument either over the counter or via a stock exchange.
When you choose derivative investments, you invest in underlying assets such as bonds, stocks, commodities, currencies, market indices, etc.
To trade in derivatives, you must speculate or predict the future fall or rise in the price of such underlying assets. Thus, with the correct speculation, you can earn a profit from derivatives.
Different Types of Derivatives
Below is a detailed breakdown of the different derivative types to invest in the market:
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Future Contracts
It is a contract between the buyer and seller to purchase or sell a certain asset at a target price on a set date. For example, you enter into a future contract to buy 100 shares at INR 1500 per share after a month. If the stock prices rise to INR 1,600 after a month, you can still buy shares at INR 1,500, making a profit of INR 10,000.
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Options
Options are also a type of contract which gives you the right but not the obligation to buy or sell an underlying asset at a predetermined price and on a set date in the future. You can buy or sell option contracts at an exchange or over-the-counter market. This is different from future contracts, as you do not have an obligation but only the right to exercise options.
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Swaps
Among the different types of derivative contracts, a swap is another investment option. It is a type of financial derivative that converts cash flow types. Unlike futures or options, this instrument is not traded at exchanges but is available on the over-the-counter market.
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Forward Contract
It is one of the types of derivatives, similar to the futures contract, but is only available at the over-the-counter market to buy and sell assets at a predetermined price and date. For example, if an investor enters a forward contract with a company to buy 500 shares at INR 1400 next month and the price increases to INR 1500, then his profit is INR 100*500 = INR 50,000.
How to Trade in the Derivatives Market?
Take a look at the section below to learn how to trade in different types of derivatives in the market:
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Selecting the Right Strategy
For derivatives, setting a strategy is more important, as, unlike stock market trades, you not only expect stock prices to rise to make a profit but also can make a profit by selling them at the right time. Therefore, you must research and choose a type of derivative as a strategy for derivative investment.
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Set up a Trading Account
Upon selecting the types of derivative investments, you must choose a trading platform with derivative trading enabled. With PL Capital Group – Prabhudas Lilladher, you can easily set up a trading account and start investing in derivatives. Download the PL Capital app and place your derivative trades.
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Select Your Preferred Contract and Stocks
Now that you have a trading account, based on your budget, choose your preferred contracts and stocks. Also, consider the underlying asset prices, margin requirements, etc., and check whether they suit your budget and start your investments.
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Trade Execution
After purchasing a contract, you must choose the mode of execution of it. You can hold your contract and exercise it on the day of its expiry and pay the margin amount to your broker. Also, you can place an opposite trade and exit the market early.
Conclusion
Learning the types of derivatives is important for you if you want to maximise your return on investments, hedge risks and more. Future, options, swaps, and forward contracts are four kinds of derivatives available in India, and you can trade based on your investment strategy and experience.
PL provides a streamlined platform, the PL Capital app, where you can trade in derivatives, stocks, mutual funds and more. Download the PL Capital app and boost your investment returns!
FAQ’s
1. Are option contracts different from futures contracts?
Yes, options are different from future contracts based on different factors. Unlike future contracts, there are only rights and no obligation to exercise a call or put option. Also, options have the potential for unlimited gains and limited risks for investors, unlike the systematic risk of future contracts (both upside and downside risks).
2. Why are swap contracts the complicated ones?
Swap contracts, unlike other types of derivatives, are complex. Swaps are suitable for mature investors as they require an extended party and market-related research. Without proper understanding and strategies, a negative market can lead to significant losses.
3. What are some examples of derivatives?
Derivatives are an investment vehicle that derives value from the market performance of underlying assets. These assets include commodities, shares, market indices, etc. You can invest in underlying assets using derivative types, like futures, options, forwards and swaps.
4. What are Over-The-Counter (OTC) derivatives?
Over-the-counter or OTC derivatives are financial contracts that are traded privately without a central exchange between buyers and sellers. OTC derivatives are swaps and forward contracts that investors buy from sellers without regulatory oversight and increased risks.
5. Which types of derivatives are traded on exchanges?
Some derivatives are also traded across exchanges like BSE and NSE, which are more organised and regulated. These derivatives are futures and options, and you can buy and trade in such derivatives with lower risks than swaps and forward contracts.
6. Do derivatives help with risk management for investors?
Yes, derivatives are widely used for managing investment risks in volatile markets. They allow investors to hedge against adverse price movements in assets such as stocks, commodities, interest rates, and currencies. By locking in prices or offsetting potential losses, derivatives help reduce financial uncertainty and exposure to risk. Instruments like futures and options are especially common for risk management.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
