Difference between equity and derivatives

A stock market or equity market is a public market for the trading of company securities listed on a stock exchange. An equity investment generally refers to the buying and holding or trading of shares to gain income from daily price movements, dividends and capital gains, as the value of the stock moves. Participants in the stock market range from small individual stock investors to large institutions and mutual funds, which can be based anywhere. The tenure of investors/traders varies from few minutes (for jobbers / arbitrageurs) to multiple years (for long term investors). The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments. Today’s equity markets provide modern, fully computerized trading systems designed to offer investors across the length and breadth of the country a safe and easy way to invest.


Financial innovation has brought many new financial instruments whose pay-offs or values depend on the prices of stocks. A derivative is a financial instrument - or more simply, an agreement between two parties. Its value is determined by the price of something else (called the underlying). Futures and options are the most common types of derivative contracts. More complex derivatives can be created by combining the elements of these basic types. They offer traders / investors the opportunity to trade, hedge and exploit arbitrage opportunities in markets. Derivatives may be used to trade large blocks of stocks for a much smaller amount of money than would be required by outright purchase or sale.