Written by Upstox Desk
6 min read | Updated on July 31, 2025, 18:25 IST
Derivatives in Finance
Equity derivatives meaning
Benefits of trading in equity derivatives
Drawbacks of trading in equity derivatives
Equity derivatives vs Index Derivatives
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Rajiv: Why do only sharks get to invest in companies? Even I want to invest in them so that my capital can grow!
Tina: Then why don't you invest in the share market? Everyone that has a demat account and sufficient balance can buy shares in the market.
Rajiv: I want to invest in equity, not in shares.
Tina: Equity refers to the ownership stake in a company whereas shares are the measurement of the ownership proportion of the individual in that company. For instance, you can buy 1000 shares of XYZ Ltd at the current price of XYZ Ltd. ₹567 and become the owner of the company to the extent of shares owned.
Rajiv: That's a lot of money. I don't have enough funds to buy direct equity. So maybe I should stick to shares. Although is there a way to buy more shares for less price?
Tina: In that case why don't you invest in equity derivatives?
Rajiv: Derivatives? What are these?
A derivative is something which is based on another source.
Let's take curd for instance. Curd is derived from milk. So it can be said that curd is a derivative of milk.
The source, which is milk in this case, is also referred to as the underlying. Any change in the price of milk will be reflected in the price of the derivative which is curd.
Derivative contracts are essentially short-term financial instruments based on an underlying with a fixed expiry date. The underlying may be a stock (equity), commodity, bond or index. Derivatives trading refers to the buying and selling of such derivative contracts.
Equity derivatives are derivative contracts that derive their value from the underlying stock. Any fluctuations in the price of underlying stock will be reflected in the price of derivatives as well.
In India equity derivatives are traded in the F&O segment of the exchange. NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) are the biggest stock exchanges in India and offer derivatives products for trading.
Point | Equity derivatives | Index derivatives |
Underlying | Stocks. Eg. Reliance Industries, Infosys. | Indices. Eg. Nifty 50, Bank Nifty. |
Expires available | Monthly expiry | Monthly and weekly expiry |
Cash settlement | Completed on T+ 1 Basis | Completed on T+1 Basis |
Physical settlement | Facility available but have to intimate the broker in advance before expiry | Facility not available |
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Upstox Desk
Upstox Desk
Team of expert writers dedicated to providing insightful and comprehensive coverage on stock markets, economic trends, commodities, business developments, and personal finance. With a passion for delivering valuable information, the team strives to keep readers informed about the latest trends and developments in the financial world.
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