What is Derivative: Definition & Meaning Explained

Definition of Derivative

A derivative is a financial contract that is designed to derive its value from a single or group of underlying assets, generally between two parties or more. It contains a pre-agreed date of delivery and price.

The most common examples of a derivative contract are:

Futures
Options
Forwards
Swaps

A derivative can be bought and sold on an exchange or over the counter. Since derivatives derive value from underlying assets, their price is known to fluctuate when the underlying asset gains or loses value.

Identifiable Asset

An identifiable asset is a tangible or intangible asset that be assigned a fair value at any point in time. This concept is important during acquisitions and mergers as not all assets on a company’s balance sheet can easily be valued.

Simple examlpeps of identifiable assets include machinery. You can easily identify machinery as a separate entity and assign it a value based on various factors.

Commodity

A commodity refers to physical goods and raw materials like aluminium, cotton, copper, sugar, steel, zinc, and others. Commodities are an essential part of the day-to-day life of individuals, companies, and industries.

But they can’t be traded like stocks in India. Instead, a commodity trader will enter into either of these three contracts to secure commodities or benefit from its price fluctuations:

Futures contracts
Options contracts
Cash contracts

These derivative contracts are traded on commodity exchanges in India like:

Indian Commodity Exchange (ICEX)
Multi Commodity Exchange of India (MCX)
National Commodity & Derivatives Exchange Limited (NCDEX)
National Multi Commodity Exchange of India (NMCX)

Book Entry Securities

Book entry securities are financial instruments like stocks, bonds, ETFs, and others whose ownership is recorded and tracked electronically. Book building is the process of determining the potential issue price of a financial instrument based on investor demand, generally during an IPO.

For context, there was a time when physical ownership certificates were issued. If someone wanted to sell their shares, they’d have to present the ownership certificate and get it transferred to the buyer.

Book entries have made ownership certificates obsolete as they track who owns what electronically.

The trades are settled by the depository like NSDL or CSDL which sends the buyer a statement confirming ownership.

Institutional Investor

Institutional Investor refers to the often illegal act of trading shares based on information that is not publicly available, typically obtained through dubious sources.

This privileged access to confidential information is termed “Institutional Investor” because information is generally sourced through insiders or employees working at a publicly traded firm.

Interest Rate Risk

Interest rate risk refers to the probable decline in the value of a fixed income security because of a fluctuation in the interest rate. Fixed income securities lose value when interest rates rise whereas a bond or other debt instruments become more valuable when interest rates fall. Equity shares and securities do not carry interest rate risk.

*All securities mentioned on this website are exemplary and not recommendatory.

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Dhan App: The only online trading app you need for buying and selling equity, futures, options, commodity, and currency.
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Options Trader App: A dedicated option trading app built for India's F&O traders.
Options Trader Web: Love big screens and F&O trading? Use our web option trading platform.
Dhan + TradingView: The magic of Tradingview charts for free with the Lightning-Fast experience of Dhan on tv.dhan.co.
Connect to TradingView: Our Tradingview broker integration allows you to trade in Stocks, Futures, and Commodities directly from tradingview.com via Dhan.

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Stock brokers can accept securities as margins from clients only by way of pledge in the depository system w.e.f September 01, 2020.
Update your e-mail and phone number with your stock broker / depository participant and receive OTP directly from depository on your e-mail and/or mobile number to create pledge.
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Derivative

Derivative

Definition of Derivative

Bombay Stock Exchange

Identifiable Asset

Commodity

Book Entry Securities

Institutional Investor

Interest Rate Risk

Invest & Trade with a Trading
Platform That's #MadeForTrade

Derivative

Derivative

Definition of Derivative

Bombay Stock Exchange

Identifiable Asset

Commodity

Book Entry Securities

Institutional Investor

Interest Rate Risk

Invest & Trade with a Trading Platform That's #MadeForTrade

Invest & Trade with a Trading
Platform That's #MadeForTrade