What is F&O and MCX trading?

Introduction

The stock market in India permits trading in two segments – the Futures and Options market and the cash market. It will be easier to explain what the Futures and Options market is through the following analogy. When you buy a product, you have two payment options – cash or credit card. Similarly, in the stock exchange, you pay the full price of the stock and take delivery of the shares in the cash segment. Suppose you buy 100 shares of X, and each share costs Rs 130, you pay Rs 13,000. When you use your credit card to buy something, you buy the object in the present and pay in the future. So, in the futures and options segment, the minimum number of shares you can buy is 1000, which is one lot. So, when you buy one lot, you do not have to pay Rs 1, 30,000 but a percentage of the amount, which is usually 10-20%.

F&O trading meaning

F&O trading means that you can buy more shares with less capital. If you wanted to buy the same number of shares in the cash market, you would have to pay the full amount.

Now let us look at MCX trading meaning. MCX stands for Multi Commodity Exchange, and is an online platform created for the purpose of trading in commodities like gold, silver, copper, zinc, lead, crude oil and others. MCX became functional in 2003, with its headquarters in Mumbai. It is the biggest exchange for commodity futures in India.

If you are wondering what is F & O and MCX trading, let us look at each of these in detail.

Futures and Options trading

The biggest advantage Futures and Options trading offers is the option to buy more with less capital. This makes it an ideal investment option if you want to make big profits quickly. However, there is a deadline of 3 months for selling the shares you buy in the futures and options market, the specifics of which depend on the contract purchased by you. When you buy shares in the cash segment, they belong to you forever. You can keep them for as long as you want and the shares can even be inherited by your children. The decision to sell is completely yours.

Futures and options trading are also known as derivative trading. They are special contracts whose value is determined by underlying security. In India, there are two kinds of derivatives available for the purpose of trade-futures and options.  When a trader takes a position of buying or selling according to an index or a stock contract, it is called futures trading. If during the course of contract the price of the share moves in a direction that is favourable to the trader, he or she makes a profit.

Basics of F&O trading

There are some basic things about futures and options trading that you should know.

• This segment makes up a major chunk of the stock exchange trading carried out in India. Futures and options are also amongst the most widely used trading instruments in the world.
• You need to pay a certain percentage of the stock price as a margin, if you wish to take a position of buying or selling with respect to an index or stock future. So, if you buy a future contract that is priced at Rs 4 lakhs, you will need to pay a fraction of the amount to the broker as the margin money.
• Your profit or loss will be calculated daily until the point you sell off the contract or its expiry, if you fail to sell it off before that.
• The margin amount is calculated on a daily basis. If the trader’s account doesn’t hold the minimum amount of cash on any day during the period when he is holding his position, the margin money has to be deposited to the broker. If the trader fails to do so, the broker is then at liberty to sell off the contract to retrieve the money.
• Derivatives have an expiry date, which is declared in advance. So, if the trader fails to sell it off before that, the contract expires. Then, the broker shares whatever profit or loss the trader makes.
• You can carry out futures trading on various indices, like NIFTY or Sensex. One of the most popular futures contracts to be traded in India is NIFTY futures.

Why should you trade in F&O?

There are numerous reasons why people trade in Futures and options.

• Traders have the option to take up the positions of buying and selling with much less capital than they could have if they choose to buy the share. So, the trading limit goes up in the case of futures and options, but so does the risk profile.
• Daily settlements are made until the day the contract expires. This means that the profit or loss is calculated at the end of every day, which is then reflected in the trader’s account.
• You do not need to have a DEMAT account to trade in futures and options. All transactions in futures are settled through cash. Exchanges hold the contract positions until their expiry.
• The positions you take with respect to futures and options are automatically carried over to the next day, and this process is repeated daily till the expiry of that contract. The trader has the liberty to square off the contract at any time within this period.

What is MCX trading?

As we have discussed above, Multi Commodity Exchange lets you trade in commodities like various precious and semi-precious metals, oils, spices and other agricultural commodities. If you are looking for a way to diversify your trading options, trading in commodities is an excellent option. If you invest in a variety of stocks, you basically lower your risk of incurring a major loss. The idiom “don’t put all your eggs in one basket” is especially true when you are trading in shares. A trader should try to invest in shares, commodities, bonds and currencies to maximize his returns.

Commodities that are sold in the market fall in two categories- hard and soft. Hard commodities are natural resources and need to be extracted- like gold, rubber and oil. Hard commodities are easy to store and do not react to weather conditions. Soft commodities are basically agricultural products like coffee, sugar, pepper and cocoa. The prices of soft commodities are influenced strongly by weather changes.

In India, the two most important commodities that dominate the commodity market are gold and silver. These are available for trade in a variety of lot sizes and commodity types. MCX is the best avenue if you wish to trade in precious metals.

MCX Trading tips

Commodity trading is a new avenue for those trading in shares, and it can be a bit daunting. Like any other form of trading, knowing some handy tips and tricks can help you ensure better profits. Here are some trading tips you will find useful.

• Stay patient –

  Patience is a useful trait to cultivate for any trader. If you are not patient, you will tend to become nervous or over-confident while making an investment, both of which can yield negative results. Actions taken hastily are the cause of downfall for many traders.

• Diversify –

  When you are investing, it is always wise to invest in a variety of commodities. This is another golden rule for any trader.

• Differentiating between stocks and commodities –

  Though some of the strategies for trading in stocks and commodities are the same, one should not be fooled into believing that they are similar. It is important to not confuse ourselves between the two. Stocks are commodities that are separate entities, and demand the use of different approaches.

• Never follow the crowd blindly –

  In the commodity market, if you believe in everything you hear, you will soon find yourself making wrong choices. The only thing you should rely on is your experience, and your own learning. If you get carried away by what others say, you will land in trouble.

• Invest slowly –

  It is always wise to go slow and steady in trade, especially when you are a beginner. The prospect of fast money is tempting, but an understanding of the market that is gained over time will ensure better returns for you in the long run.

• Ask for help when you need it –

  At the beginning, there is no shame in asking for help. There are a bunch of analysts and advisors available if you need some expert advice. If you are feeling lost, seek the help of a good analyst, instead of going to other people asking for opinions.

• Understand the risks –

  You should always take into consideration the risks involved in trading in commodities.

• Be willing to learn –

  As an investor, you should always stay up to date about current news, and be flexible and adept at changing your strategies as and when the situation demands. Your investment ideas should also evolve over time, picking up new techniques as you gain experience.