The Indian stock market can be categorized into two based on the type of financial instrument being traded. As a result, we have the equity market and the derivative market. The one feature they have in common is that they can both be purchased and sold. Here is a detailed comparison of the two.
What is the Equity Market?
In equity trading, those who hold equity are known as the owners of the company and its assets. Large companies raise funds through the issuing of shares and a buyer then becomes part owner of that company. This is a cash segment and the buyer and seller usually arrive at a negotiated price for trading. The buyer pays the entire value of the stock which can be got hold of by multiplying the number of stocks with the current market price of one stock. This is similar to investing in a start-up or similar venture.
What is the Derivatives Market?
A derivative is an instrument that gets its value from various underlying assets. Futures, swaps, forwards, and options are all examples of derivatives. Stocks, bonds, commodities, currencies, and interest rates all qualify to be underlying assets. These are great for speculation and hedging. Future contracts and option contracts are the most frequent instruments used and trades are conducted in lots.
What are the features of Equity and Derivatives Market?
The value of equity is reliant on a range of factors such as demand and supply, performance of the company, and economic or political events.
The value of derivatives is analysed by the strength of the underlying asset. When the asset is currency then its movement will establish the value of the derivative.
A transaction in the equity market is said to be concluded once the stocks are transferred to the Demat account of the buyer.
A future contract in the derivative market has to be closed within a specific time and at a fixed rate.
An options contract in the derivative market also gives you the option of ignoring it all together.
Both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) offer trading in equities as well as derivatives. Online trading and services such as zero brokerage has increased the number of trades being placed in both these segments.