Derivatives

DEFINITION: Derivatives are financial instruments that derives its values from underlying assets. The underlying assets can be stocks, bonds, commodities etc. Derivatives can be of different types like futures, options, swaps, caps, collars etc. Most popular are futures and options. The phrase 'Derives its value from underlying assets' means, derivative on its own doesn't have any value. Its importance is by the virtue of its underlying assets. For ex. Infosys future has value due to the value of Infosys. FUTURES: These contracts are traded on the stock exchanges and it can change many hands before final settlement is made. There are two kinds of futures traded in the market- index futures and stock futures. An index is a set of numbers that represent a change over a period of time. A stock index is similarly a number that gives a relative measure of the stocks that constitute the index. Each stock will have a different weight in the index The Nifty comprises of 50 stocks. BSE Sensex comprises of 30 stocks. For example, Nifty was formed in 1995 and given a base value of 1000. The value of Nifty today is 1172. What it means in simple terms is that, if Rs 1000was invested in the stocks that form in the index, in the same proportion in which they are weighted in the index, then Rs 1000 would have become Rs 1172 today. What the terminologies used in a Futures contract? The terminologies used in a futures contract are: • Spot Price: The current market price of the scrip/index • Future Price: The price at which the futures contract trades in the futures market • Tenure: The period for which the future is traded • Expiry date: The date on which the futures contract will be settlec • Basis : The difference between the spot price and the future price Why are index futures more popular than stock futures? Globally, it has been observed that index futures are more popular as compared to stock futures. This is because the index future is a relatively low risk product compared to a stock future. It is easier to manipulate prices for individual stocks but very difficult to manipulate the whole index. Besides, the index is less volatile as compared to individual stocks and can be better predicted than individual stock

By Amitabh Bacchan ( Big B )

Interesting read ...The reality of wealth

In 1923, eight of the wealthiest people in the world met. Their combined
wealth, it is estimated, exceeded the wealth of the government of the United
States at that time. These men certainly knew how to make a living and
accumulate wealth.

But let's examine what happened to them 25 years later.

1. President of the largest steel company, Charles Schwab, lived on borrowed
capital for five years before he died bankrupt.

2. President of the largest gas company, Howard Hubson, went insane.

3. One of the greatest commodity traders, Arthur Cutton, died insolvent.

4. President of the New York Stock Exchange, Richard Whitney, was sent to
jail.

5. A member of the President's Cabinet, Albert Fall, was pardoned from jail
to go home and die in peace.

6. The greatest "bear" on Wall Street, Jessie Livermore, committed suicide.

7. President of the world's greatest monopoly, Ivar Krueger, committed
suicide.

8. President of the Bank of International Settlement, Leon Fraser, committed
suicide.

What they forgot was how to make a life! Money in itself is not evil! Money
provides food for the hungry, medicine for the sick, clothes for the needy.
Money is only a medium of exchange. We need two kinds of education. One that
teaches us how to make a living and one that teaches us how to live. There
are people who are so engrossed in their professional life that they neglect
their family, health and social responsibilities. If asked why they do this
they would reply that they were doing it for their family.

Our kids are sleeping when we leave home. They are sleeping when we come
home. Twenty years later, we'll turn back, and they'll all be gone. Without
water, a ship cannot move. The ship needs water, but if the water gets into
the ship, the ship will face problems. What was once a means of living for
the ship will now become a means of destruction. Similarly we live in a time
where earning is a necessity but let not the earning enter our hearts, for
what was once a means of living will be become a means of destruction.

So take a moment and ask yourself....has water entered my ship?