Project on Investment in Securities Market
Financial Planing
(Source: SEBI Website - Securities Market Awareness Campaign
Empowering Investors Through Education)

How to transact in securities?
Derivative Market

A derivative is a contract which derives its value from prices or index of prices of securities. It helps you to protect your position in securities from price risk and to increase the returns from your investments. A derivative contract is legal and valid only if such contracts is traded on a recognized stock exchange. If you trade in derivatives on an exchange, clearing corporation becomes the legal counterparty to all trades executed on the exchange and guarantees settlement; you do not have to search for a counter party to trade with you as the market provides liquidity, and formal rules and mechanisms of the exchange ensure market stability and integrity. The commonly versions of derivatives are futures and options. Standardised derivatives contracts such as Index Futures, Index Options, Stock Futures and Stock Options are currently traded on Indian exchanges.

Stock exchange designs derivative contracts and provides you an opportunity to trade in those contracts. It guarantees settlement of contracts executed on your behalf and provides you protection if your brokers becomes a defaulter. You can trade in derivatives only through a broker. He is a SEBI registered intermediary who trades on an exchange on your behalf. Your relation is governed by the terms set out in the client-broker agreement. The broker must be registered with SEBI, which you should verify from the registration certificate displayed at his office.

Usually you are required to pay an initial margin, which seeks to capture the largest loss that a portfolio might reasonably be expected to suffer from one day to the next day, upfront, i.e. before the trade is executed. This is intimated to you by your broker. You may be required to keep an upfront margin with the broker either in cash or in the form of acceptable collaterals. This is essential since the margins are required to be paid upfront by a client, at the time a trade is executed. This avoids daily margin calls on the client.

You may report your complaints/grievances to the Investor Grievance Cell. Alternatively, you may refer the matter to Arbitration or may approach the Defaulters Committee to lodge your claim against the Defaulter. Further, you may seek protection from the Investor Protection Fund of the respective exchange. The Fund makes good your claims, which may arise out of non-settlement of obligations by a broker, in respect of trades executed on the exchange if the broker is declared defaulter.

You may either keep an amount with the broker for adjustment against settlement obligations, or may pay separately for each contract, as agreed to in the client-member agreement. It is however advisable to reconcile the accounts with broker frequently to avoid disputes.

You should get credit in your account for the payments in respect of contracts sold by you within the time stipulated by the Exchange. However, you may get credit either daily or at intervals as agreed to in the client-member agreement.

You should take up the matter with Investor Grievance Cell of the concerned Exchange