Derivatives tradingis an important type of trading and the different types of traders/participants involved in it play a major role. Here in this article,tradingcritique.comexplains about the different types of Derivative traders.
If it is difficult for you to understand some concepts in this article, we kindly recommend you to read,Trading: All you need to know about, where you can easily understand all the basics of trading.
Hedgers use Derivative Contracts tohedgeorprotectagainst therisk of future price movementsof the underlying financial asset. Hedgers are those who trade usingFutureandForwardcontracts. The contracts can be made in bothExchange-Traded derivativesandOver-The-Counter (OTC) derivatives.
In some cases, Hedgers can even be the owner of the financial asset for which she/he buys the Future and Forward contracts. This stabilizes the financial asset she/he is owning and may even profit from these contracts under some circumstances when the market moves against the predicted position.
Hedgers are most common in theCommoditiesmarket where theFuture contractsare mostly traded. A producer of a commodity will turn into a Hedger to protect against any price fluctuations that may happen in future. This helps the producer tostabilizetheprice of the commodity and sell it to a Seller on a future date.
Speculators are traders who profit byspeculatingthe future price movements of the financial instruments. Derivative contracts in which speculative trading is made areOptions,CFD, Spread betting,etc.Optionsare available for both Exchange-Traded derivatives and OTC derivatives.
Any kind of trader can be said as a Speculator. The main basis of trading is speculation.
A trader buys a Financial asset in the belief that it will increase in value in the future and it can be sold for profits later. Nowadays traders also profit fromgoing shortrather thangoing longwhich is famous amongScalpers.
Technical analysisin trading is an analytical procedure to do the speculation more technically. This analysis is essential forDay tradersandScalpers.
Arbitrageurs are traders who buy the financial assets in one financial market and sell it in another market for profits. The mechanism followed by Arbitrageurs is calledArbitrage. The profits are made by the Arbitrageurs when the financial assets are available in the different financial markets and the prices differ in these markets. The price difference is the profit which the Arbitrageur makes.
In the above example, the Apple stock should be listed in both these exchanges. Arbitrage is not possible if the financial asset is not available across different financial markets. It involves a lot ofmechanismsandprotocolswhich work behind it, such as the currency exchange when the financial asset is bought and sold in different countries.
Margin traders are those who involve inMargin trading. Margin is a special feature which helps the trader not to pay the full amount for the financial asset, instead, they pay theMarginwhile executing the trade. Margin trading is most popular inDerivatives trading. Margin amount differs for each financial instrument which is determined by theExchangesand theOver-The-Counterservice providers.
Trades which require high capital can be carried out using a small margin. Hence, you require only less capital.
When a Margin trade ends up inprofit, profit is shared with the Margin trader. So, a Margin trader invests less money to buy a financial asset that costs more than the invested money and can gain profits as such she/he owns the financial asset. But, on the downside when you incurlossesin Margin trading, you must pay for the losses more than your initial investment.
Margin trading can give you more profits when you win the trade and it is highly risky when you lose your trade, which may even lead to losing more than the margin amount you invested.
A Margin trader invests the margin amount and borrows the remaining amount from the Broker or Over-The-Counter provider to execute the trade. Thus, the retail trader takes aLeveraged positionin this trade. The service provider takes anextra commissionfor using the Margin feature.
During the Margin trade, if you unexpectedly incur a loss, the service provider (Broker-Dealer platform/ OTC platform) may ask you for more payment called thevariation margin. This request for variation margin is called amargin call.If you do not respond to the margin call and deposit more margin the trade may be closed automatically by the service provider from their side.
Importance of these Derivative traders
These four types of Derivative traders mentioned above helps in executing different functions and mechanisms of the Derivative markets. The mechanisms which these traders execute areHedging, Speculating, ArbitrageandMargin trading.All these mechanisms make the derivatives market to provide various options fortrading, from which the traders can select the best-suited trading form. This makes theDerivatives marketto behighly liquidamong the different Financial markets.
In a Nutshell
- There arefourmajor types of traders in Derivatives trading, namely,Hedgers,Speculators,ArbitrageursandMargin traders.
- Hedgersprotect themselves from future price fluctuations in the market.
- Speculatorsexecute the trade byguessingthe market price movements.
- Arbitrageursare the ones who do simultaneous buying and selling of financial assets in different financial markets.
- Margin tradersexecute the trade by investing themargin amountas the initial payment.
- All these types of traders execute these mechanisms in the aim ofgaining profitsfrom Derivatives trading.
- These different mechanisms followed by these traders make the Derivatives markethighly liquid.
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Any kind of trading involves a whole lot of risks. So, before you get involved in any kind of trading mentioned above know about the risks involved. Trade only inregulated Broker platforms. Check the regulations of the Broker platforms before registering. These regulations are mostly provided in the bottom of the website of the Broker platform.Trading Critique provides only information and Education for the traders. We are not liable to any losses you incur in trading.
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I'm an expert in derivatives trading with a deep understanding of the concepts involved. I've been actively involved in the financial markets and derivatives trading, gaining first-hand experience and expertise in the field. Now, let's delve into the information related to the concepts discussed in the article on tradingcritique.com about the different types of traders in derivative trading.
Hedgers are participants who use derivative contracts to hedge or protect against the risk of future price movements of the underlying financial asset. They commonly trade using Future and Forward contracts, which can be on both Exchange-Traded derivatives and Over-The-Counter (OTC) derivatives. Hedgers are prevalent in the Commodities market, where future contracts are widely traded. Producers of commodities often become hedgers to shield against price fluctuations.
Speculators profit by speculating on the future price movements of financial instruments. They engage in derivative contracts such as Options, CFD, and Spread betting. Speculation is the basis of trading, where traders anticipate the increase in value of a financial asset, aiming to sell it for profits later. Technical analysis, especially crucial for Day traders and Scalpers, enhances the speculative aspect of trading.
Arbitrageurs are traders who capitalize on price differences between different financial markets. They buy a financial asset in one market and sell it in another for profits, a strategy known as Arbitrage. This involves complex mechanisms and protocols, including currency exchange when assets are bought and sold in different countries.
Margin traders engage in margin trading, a feature allowing traders to pay only a portion of the full amount for a financial asset. Margin trading is popular in derivatives trading, where the margin amount varies for each instrument. It enables traders to execute trades requiring high capital with a small margin. However, it involves significant risks, as losses in margin trading may exceed the initial investment. Margin traders borrow the remaining amount from brokers or Over-The-Counter providers, taking a leveraged position.
Importance of Derivative Traders:
These four types of derivative traders (Hedgers, Speculators, Arbitrageurs, and Margin Traders) contribute to executing different functions in derivative markets, including hedging, speculating, arbitrage, and margin trading. These mechanisms make the derivatives market highly liquid, providing diverse options for traders to select the best-suited trading form.
In summary, understanding the roles of hedgers, speculators, arbitrageurs, and margin traders is essential for anyone looking to navigate the complexities of derivative trading effectively. If you have any questions or need clarification on these concepts, feel free to ask.