Chapter 2: What Is the Difference Between Equity, Futures and Options?

• What is equity trading?

Equity trading means buying or selling shares of a company.

When Bob buys 100 SBI shares, he owns those shares until he sells them.

Equity can be used for both short-term trading and longer-term investing.

• What is futures trading?

A futures contract is a derivative contract whose value is linked to an underlying asset such as a stock or index.

Instead of buying SBI shares directly, Bob could trade an SBI Futures contract. Futures are traded using margin and have a defined expiry.

Because futures provide greater market exposure relative to the margin required, both potential gains and losses can be significant.

• What is options trading?

An option gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price, according to the terms of the contract.

The two basic types are:

• Call Option: Right to buy

• Put Option: Right to sell

The option buyer pays a premium for this right.

Example: Bob expects SBI to rise and buys an SBI Call Option. If the option moves favourably, its value may increase; if the expected move does not happen, the option can lose value.

• What is the difference between equity and F&O?

Equity	Futures & Options
You buy or sell shares directly	You trade derivative contracts
Shares can generally be held indefinitely	Contracts have expiry dates
Can be used for investing or trading	Primarily used for trading, hedging and other strategies
Delivery of shares is possible	Settlement depends on the type of derivative
Generally requires the purchase value for delivery	Futures are traded using margin; options involve premium

Example: Bob can buy SBI shares and hold them for several years. Alternatively, he can trade an SBI Futures or Options contract with a specific expiry.

• What is intraday trading?

Intraday trading means opening and closing a position on the same trading day.

Example: Bob buys SBI at ₹800 at 10:00 AM and sells it at ₹810 at 1:30 PM on the same day. The position has been closed within the trading session.

Intraday traders often use shorter timeframes, price action, volume and indicators to analyse market movements.

• What is positional or swing trading?

Swing or positional trading involves holding a position beyond the same trading day, usually for several days or weeks, with the objective of participating in a larger price movement.

Example: Bob identifies a potential bullish setup in HAL at ₹5,000. Instead of closing the position that day, he holds it for several days while monitoring the trend and price action.

Swing traders may use higher timeframes, trends, support and resistance, momentum and volume as part of their analysis.