Equity and Derivatives

Equities- For Long Term Investment

Long term investments in Equities offer one of the highest returns which are quite significant even after adjusting to the impact of inflation , as compared to other assets. This makes it possible for the investors to keep up with the lifestyle without cutting down on any expenses even when the prices of goods are gradually increasing. 

Equity investments have the potential to offer returns in multiples of the invested capital when held for a longer period over 5 years. The longer one holds equity investments, the risk could minimise from low to nil. Equity investments can make achieving Financial Goals much easier, if invested from a very early age regularly, holding for long.

Despite this high return potential of equity investments Indians are heavily underinvested in equities with just about 5% penetration which is significantly lower than most developing and developed nations.

The choice of the stock is paramount in equity investing which has to be done based on the management quality, nature of business, future potential of the business model, market share, profitability and competitive advantage. Equity shares are categorised as Largecap, Midcap, Smallcap and Microcap by market capitalisation. Larger the market cap higher is the stability and lower is the risk. Smaller the market cap higher is the scope of returns and risk.

Investors can invest in equities through the primary market taking the IPO route before the listing of a stock and the secondary market after the listing of a stock.

Apart from returns through the appreciation of stock price, investors can also make decent regular returns though dividends.

Equity Derivative – For Short Term & Trading

What is an Equity Derivative?

An equity derivative is a financial instrument whose value is based on the equity movements of the underlying asset. For example, a stock option is an equity derivative, because its value is based on the price movements of the underlying stock.

Investors can use equity derivatives to hedge the risk associated with taking long or short positions in stocks, or they can use them to speculate on the price movements of the underlying asset.

Understanding Equity Derivative

Equity derivatives can act like an insurance policy. The investor receives a potential payout by paying the cost of the derivative contract, which is referred to as a premium in the options market. An investor that purchases a stock, can protect against a loss in share value by purchasing a put
option. On the other hand, an investor that has shorted shares can hedge against an upward move in the share price by purchasing a call option.

Equity derivative can also be used for speculation purposes. For example, a trader can buy equity options, instead of actual stock, to generate profits from the underlying asset’s price movements. There are two benefits to such a strategy. First, traders can cut down on costs by purchasing options (which are cheaper) rather than the actual stock. Second, traders can also hedge risks by placing put and call options on the stock’s price.

We share a curated list of investment and trading ideas on a regular basis for our customers to choose from.