Difference Between Futures And Options (F&O) And Regular Cash Market

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There are two segments that you can trade in the stock markets in India. One is the Futures and Options (F&O) market and the other is the cash market. The third of course is the IPO market, but, you do not trade here, because you can only buy and cannot sell.

The difference between the cash market and the F&O segment can be explained with the help of this analogy. Let's say you buy a product. You either pay by cash or by credit card. In the cash segment of the stock exchange, you pay the entire amount in cash and the shares are delivered to you.When you buy an item on a credit card, you buy now and pay later.

Difference Between Futures And Options (F&O) And Regular Cash Market
In the futures segment, you buy shares and pay only a margin amount. You have to then square-off your position and sell the entire lot of shares. Let's make this even simpler.

If you buy 100 shares of Bank of India you pay Rs 13,800, because the share price is at Rs 138. In the futures segment (F&O) you cannot buy 100 shares, because you have to buy in a minimum lot of 1, which is 1000 shares. So, you buy 1000 shares, but, you do not pay Rs 1,38,000, but only the margin amount, which could be anywhere between 10-20 per cent (mostly). So, you may end-up paying only Rs 25,000-30,000 in the futures and options market.If you had to buy a similar quantity in the cash market you would need to pay the entire amount of Rs 1,38,000.

But, in the futures and options market (F&O) you have to sell the shares, within a maximum period of three months, depending on the contract you have purchased. In the cash segment, you can buy and hold for a lifetime and your children could inherit the shares. You do not have to sell. So, the basic difference between the Futures and Options F&O segment and cash market is explained in the table below.

What is the difference futures & options (F&O) segment and regular cash market?

Futures Cash market
 Very high exposure, because you cannot trade in small amounts. Can buy even 1 share.
 You are not a shareholder You are a shareholder.
 You do not receive dividends, bonus, rights and other benefits. You receive dividends, bonus, rights and other benefits.
 Generally suitable for traders. Suitable for long term investors.
 Highly risky. Not very risky for long term investors.
 Have to sell or square-off your position. Can keep the shares for a lifetime.

Conclusion

A small investor should understand that the F&O or futures segment is for large institutional clients. It is highly risky to dabble in the futures and options segment. This perhaps is the biggest difference between the F&O and the cash market, unless you know how to hedge your risks. 

GoodReturns.in

Read more about: futures, cash market
Story first published: Saturday, October 24, 2015, 11:17 [IST]
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