Like share trading in the cash segment (buy & sell shares), derivative is another kind of trading instrument. They are special contracts whose value derives from an underlying security. Futures and Options (F&O) are two types of derivatives available for the trading in India stock markets.
In futures trading, trader takes the buy/sell positions in an index (i.e. NIFTY) or a stock (i.e. Reliance) contract. If, during the course of the contract life, the price moves in traders favor (rises in case you have a buy position or falls in case you have a sell position), trader makes profit. In case the price movement is adverse, trader incurs losses.
With futures trading, trader can leverage on trading limit by taking buy/sell positions much more than what you could have taken in cash segment. However, the risk profile of your transactions goes up.
Settlements are done on daily basis (MTM) until the contract expires. Profits/losses are calculated (and credited/debited in traders account) on end of the day every day.
Demat account is not needed for F&O trading. All futures transactions are cash settled. Contract positions are hold by the exchanges until they expire.
The F&O positions are carrying forward to next day and can be continued till the expiry of the respective contract and squared off any time during the contract life. This is different from 'Margin Trading' where trader has to close the position the same day.
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