They can go up and down in response to various factors including the state of the economy, weather, agricultural production, election results, coup, war, and government policies.
Naturally, people who are operating in these markets will be concerned about price fluctuations, as a change in prices can mean losses - or profits.
To protect themselves, they resort to derivatives such as futures and options.
A derivative is a contract that derives its value from the underlying assets; Underlying assets may include stocks, commodities, currency, etc.
In this type of contract, a buyer (or seller) agrees to buy (or sell) a certain quantity of a particular property at a fixed price at a future date.
Suppose you bought a futures contract for 50 rupees on a specific contract to buy 100 shares of company ABC.
At the expiration of the contract, you will get 50 rupees to those shares, irrespective of the current prevailing price.
Even if the price goes up to Rs 60, you will get each share at Rs 50, which means you can make a profit of Rs 1,000.
Even if the share price falls to Rs 40, you still have to buy them for Rs 50 each.
Stock is not the only asset in which futures are available.
Futures are invaluable in avoiding the risk of price fluctuations.
A country that is importing oil, for example, will buy oil futures to protect itself from future price increases.
This is slightly different from a futures contract, in that it gives a buyer (or seller) the right to buy (or sell) a particular asset at a fixed price
A call option is a contract that gives the buyer the right, but not the obligation, to buy a particular property at a specific price on a specific date.
Suppose you bought a call option to buy 100 shares of company ABC for every 50 rupees on a fixed date.
But the share price falls below Rs 40 at the end of the expiry period, and you are not interested in going through the contract because you will be
Then you do not have the right to buy the shares for 50 rupees.
So instead of losing Rs 1,000 on the deal, your only loss will be the premium paid to enter into the contract, which will be very low.
In this type of contract, you can sell the property at an estimated price in the future, but not the obligation.
A loss of Rs 1,000 would have been avoided.
One advantage of futures and options is that you can trade them openly in various exchanges.
Like you can trade options on stock exchanges and stock exchanges, commodities on commodity exchanges, and so on.
While you are not interested in buying gold per second, you can still take advantage of fluctuations in the value of commodities by investing in gold futures and options.
You will need very little capital to benefit from these price changes.
Many people are still unfamiliar with futures and options in the stock market.
However, these have been increasing in popularity in recent years, so it may be to your advantage to learn more about it.
The National Stock Exchange (NSE) introduced index derivatives in the year 2000 on the benchmark Nifty 50.