Exchange derivatives markets are virtual platforms on which special contracts are traded - futures and options. These instruments are also called derivatives, or derivatives, since they come from an asset.
For example, the stock market trades in stocks of a certain company, and on the derivatives market - futures and options for these stocks. Derivatives have a specific maturity. And therefore, the markets in which they are traded are called derivatives. In terms of trading volumes, derivatives markets were long ahead of the classic ones, since derivatives have significant advantages over stocks.
Shoulder effect
Derivatives - deferred payment contracts. To buy futures today, you do not need to pay its full price. When you open a position, the exchange only blocks a certain amount on the trader’s account - guarantee security. Its size depends on the instrument and the current market situation, but usually fits into 5–20% of the contract value. It turns out that the trader can operate with an amount several times higher than his own funds. That is, to trade with the “shoulder”. For example, the derivatives market of the Moscow Exchange makes it possible to trade derivatives on blue chips with a “leverage” of 1: 7. Futures on the RTS index is trading at a maximum leverage of 1:10, and contracts for currency pairs - 1:14.
Such a lending mechanism exists in the stock market, but it is implemented using borrowed funds. Therefore, the broker establishes its conditions. So, the size of the “leverage”, as a rule, does not exceed 1: 2, and a fee is charged for providing such a loan. And the derivatives market allows the trader to use the larger “leverage” for free.
Wide range of tools
Another global plus in derivatives markets is the wide variety of instruments available for trading. The underlying asset of futures and options may be securities, currency pairs, stock indices, interest rates, volatility indicators (rate of change in the price of an asset), goods - metals, energy, agricultural products. Moreover, their trade does not imply the obligatory supply of an asset, for example, oil, currency or grain. Traders can open a position, make a profit (or make a loss) and, before the contract expires, make a reverse transaction.
The derivatives market of the Moscow Exchange offers traders more than 60 instruments for trading. True, most of them are not yet well developed. But derivatives in Russia have a very short history, and probably their "golden age" is yet to come. Nevertheless, already now the Russian futures and options market for cash flows is almost 2 times larger than the stock market.
Low fees
Small commission fees are another feature that distinguishes the derivatives market. The exchange and broker charge a flat fee for each contract bought or sold. First of all, this is relevant for traders carrying out many transactions during the trading session. When implementing such a strategy on stocks, commission payments take the lion's share of the profit. Or significantly increase the loss. Whereas in many derivatives markets for transactions carried out internally, lower exchange and brokerage commissions are established.
Loss limit
On the spot market, bidders limit the size of their risk on the transaction by placing stop orders. However, due to the “slippage” of the price during strong movements, as well as for technical reasons, their performance cannot be guaranteed 100%. Many traders know how much a stop can fail on time. At the same time, derivatives markets provide an opportunity to fully insure against such troubles. For this purpose, options are used, often together with futures or positions on the underlying asset. Due to the specifics of the option contract, its buyer cannot lose more than the amount paid for it. Thanks to this, you can cost a strategy with a predetermined loss level and potential for profit growth.
The ability to make money in any situation
As you know, when trading stocks, you can only make a profit by moving the price in a favorable direction. In this case, the trader needs not only to guess where the market will go, but also to wait for a strong movement. But derivatives markets provide an opportunity to build strategies that have a profit potential in any market situation. For example, those that can generate income with a strong change in the price of the underlying asset, regardless of direction. Such strategies are used in anticipation of the release of high-profile news, the publication of reports of issuers and in other cases. Or, on the contrary, you can earn on the fact that the price of an asset for a long time is practically in place. You can bet on the growth or decline of not a certain company, but the entire market. Or to earn on arbitrage between the price of an asset in the stock market and futures for it - on the derivatives. In addition, by opening positions opposite to those on the underlying asset in derivatives, you can protect them from risk (hedge) in case of negative expectations. Futures and options allow you to build many different strategies.
With the competent handling of derivatives, the trader has huge opportunities for earning and protecting their assets. However, one should not forget about the high risks that derivatives carry when they are thoughtlessly used. First of all, it concerns speculative operations. Indeed, thanks to the “leverage” effect, not only profit but also loss is multiplied. Therefore, in the derivatives market it is extremely important to apply the principles of risk and capital management.