Derivatives are sold to beginners as the cheap way into the market. The rule book says otherwise. A derivative is a small payment attached to a large obligation, and in India that obligation is deliberately large. Since 20 November 2024, a new index contract must be worth at least ₹15 lakh at introduction, under a Securities and Exchange Board of India (SEBI) circular. You post a margin. You carry the whole contract.
What are Derivatives?
A derivative is a contract that takes its value from something else. That something else is the underlying asset: a share, an index, a commodity such as gold, or a currency pair.
You are not buying the asset. You are buying a contract that tracks its price. If the Nifty 50 moves, a Nifty 50 contract moves with it, though you own none of the fifty companies in it.
The term has legal standing. The Securities Contracts (Regulation) Act, 1956 covers contracts derived from securities and indices, placing them under SEBI supervision.
How Do Derivatives Work?
Three things are fixed before you order: what the contract tracks, how much you control, and when it ends.
The size is set by the exchange. These contracts trade in lots, and you cannot buy half a lot. SEBI requires an index lot sized so the contract is worth ₹15 lakh to ₹20 lakh at review.
Expiry is fixed too. Since 1 September 2025, National Stock Exchange (NSE) contracts expire on a Tuesday, and Bombay Stock Exchange (BSE) contracts on a Thursday.
You pay margin, not full value. Profit and loss are still worked out on the full contract.
Types of Derivatives
Four types exist. Two matter to a retail beginner.
- Futures: both sides must buy or sell at a set price on a set date. No choice at expiry.
- Options: the buyer gets a right without an obligation, bought with a premium. A call is a right to buy, a put a right to sell. The seller, the option writer, must settle if exercised.
- Forwards: a private, customised future. Not exchange traded, so both sides carry counterparty risk, the risk the other party cannot pay.
- Swaps: one cash flow exchanged for another. Institutional.
Futures and options trade on NSE, BSE and MCX with a clearing corporation behind settlement, which is why futures and options trading covers nearly all retail activity.
Why are Derivatives Used?
Three jobs, and the order they arrived in tells you something.
Hedging came first. A jeweller sitting on gold stock, or an exporter awaiting a dollar payment, fixes a price now to remove uncertainty later. This is why commodity trading on MCX exists at all.
Arbitrage came second. Traders profit from a price gap between contract and underlying, and in closing it they keep both prices honest.
Speculation came third and now dominates. In FY20, of every ₹100 individuals traded here, roughly ₹5 went into index options. By FY25 it was ₹41, per SEBI.
Benefits of Derivatives
Four benefits are real. Each carries a condition, so read them as pairs.
Capital efficiency lets you control a contract by posting margin, not full value. The same arithmetic multiplies a loss.
Two-way positioning lets you take a view on a fall as easily as a rise. Direction alone is not enough, because the contract has a deadline.
Price protection lets a business fix a cost in advance. Contracts in USD-INR, EUR-INR, GBP-INR and JPY-INR exist for that, which is what currency trading is for.
Liquidity is high in active contracts. Segment turnover averaged ₹2,63,832 crore a day in FY25 against ₹1,20,782 crore in the cash market, per SEBI. Thin contracts cost you twice.
Risks Associated with Derivatives
The regulator publishes the odds for its own market. Around 91% of individual traders in the equity derivatives segment made a net loss in FY25, on a combined net loss of ₹1,05,603 crore after costs. That averages ₹1,10,069 per person, per SEBI’s July 2025 study.
Nor was it one unlucky year. The loss-maker share sat between 90% and 92% every year from FY22 to FY25.
Four mechanisms produce it. Leverage calculates an adverse move on the full contract, so a loss can exceed your margin. Expiry makes being right late the same as being wrong. Time decay erodes an option’s value daily. Costs accumulate either way: brokerage, Securities Transaction Tax (STT), transaction charges, GST and stamp duty.
Also Read - Want to understand the potential advantages and risks in greater detail? Read our guide on risks and benefits of derivatives to make more informed trading decisions.
Derivatives vs Stocks: What’s the Difference?
Both give exposure to a company or an index. Little else matches.
Feature | Stocks, delivery | Derivative contract |
What you hold | Shares in a company | A contract, no ownership |
Time limit | None | Fixed expiry date |
Minimum size | One share | One exchange-set lot |
Leverage | Separate funding product | Built in through margin |
Dividends and voting | Yes | No |
Loss ceiling | Capital invested | Can exceed your margin |
Leverage on shares is optional, not built in. Under a margin trading facility, Indiabulls Securities funds part of a purchase at a flat 14% per annum, charged on the borrowed amount and accruing until you close. Losses amplify in proportion with gains.
Who Should Invest or Trade in Derivatives?
Three groups have a genuine use.
Businesses with real exposure. An importer, exporter or stockist already carries a price risk, and a contract reduces one they did not choose.
Experienced traders with surplus capital, who can lose the margin without it changing anything.
Investors hedging a concentrated holding against a fall without selling the shares.
They do not suit a first-time investor, anyone trading borrowed money, or anyone needing that capital within a year. Unique individual traders fell 20% year on year to May 2025, to roughly 67.5 lakh, per SEBI.
How to Start Trading in Derivatives?
The mechanics take a day. The preparation should take longer.
- Open the accounts. You need to open a demat account and a trading account with a SEBI registered broker, which needs PAN, Aadhaar, a bank account and KYC.
- Activate the segment. Brokers run an income and suitability check first.
- Fund the margin, using a margin calculator to check the requirement before you trade.
- Pick one contract. Note its lot size, its expiry, and what one lot costs in charges if the price never moves.
- Place the order with an exit rule already decided. A rule set after entry is a hope.
Indiabulls Securities charges 2.5% or ₹11 per executed order, whichever is lower, in NSE (CM, FO, CD), BSE (CM, FO) and MCX.
Key Terms Every Beginner Should Know
Eight terms cover most of your first month.
- Underlying asset: what the contract tracks.
- Lot size: the fixed quantity in one contract.
- Expiry: the date it ends and settles.
- Strike price: for an option, the price at which the right can be exercised.
- Premium: what the option buyer pays the seller for that right.
- Margin: the exchange deposit, recalculated daily.
- Option writer: the option seller, who takes the obligation the buyer paid to avoid.
- Settlement: index contracts settle in cash, open stock contracts by delivery of shares. Hence the demat account at expiry.
Conclusion
A derivative is a contract on a price, sized by the exchange and ended by a date it enforces. That makes it useful to a business carrying a risk it did not choose, and hazardous to a beginner treating it as a cheaper share.
Before a first position, run three checks. Work out the full contract value, not the margin. Work out what one lot costs in charges if the price goes nowhere. Then ask whether you would hold it to expiry. If not, the position is too large.