Derivative means an instrument with underlying assets based on equity securities. An equity derivative's value will fluctuate with changes in its underlying asset's equity, which is usually measured by share price.
Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. Derivatives are generally used to hedge risk, but can also be used for speculative purposes.

Equity Derivative

Investors can use equity derivatives to hedge the risk associated with taking a position in stock by setting limits to the losses incurred by either a short or long position in a company's shares. The investor receives this insurance by paying the cost of the derivative contract, which is referred to as a premium. If an investor purchases a stock, he or she can protect against a loss in share value by purchasing a put option. On the other hand, if the investor has shorted shares, he or she can hedge against a gain in share price by purchasing a call option. Options are the most common equity derivatives because they directly grant the holder the right to buy or sell equity at a predetermined value. More complex equity derivatives include equity index swaps, convertible bonds or stock index futures.

Leverage

Enables you to get higher trading exposure with a low margin amount

Hedging

Allows you to safeguard yourself against potential losses, by hedging your positions. As a part of this, you buy in the cash segment and agree to sell in the derivatives market or vice versa.

Risk Flexibility

Allows you to choose between conservative or high risk strategies based on the expected rise and fall of stock prices

Higher Probability of Returns

Possibility to garner returns irrespective of market moving up, down or sideways

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