Derivatives

Contracts whose value derives from something else: a share, an index, a bond, a currency, a commodity or an interest rate. The four basic kinds are forwards, futures, options and swaps, and almost every complex product is built from them.

They serve two opposite purposes. A hedger uses them to remove a risk it already carries, such as an exporter locking in an exchange rate; a speculator uses them to take on risk with little money down. A futures position on ₹12 lakh of an index can be held with margin of about ₹1.8 lakh, so a 5% move changes its value by ₹60,000, a third of the money put up.

That leverage is why India's exchange-traded derivatives market is among the world's largest by number of contracts, and why SEBI's studies have found that about nine in ten individual traders in equity futures and options lost money over the periods examined.

Know which side of the hedge you're on.