Difference Between Equity and Derivatives

Equity means direct ownership with voting rights and possible dividends, while derivatives are contracts based on underlying assets, used for hedging or speculation and have expiry and leverage.
OPEN ACCOUNT
Difference Between Equity and Derivatives
OPEN ACCOUNT
3 min
31-Dec-2025

The financial market has various segments where different types of securities are traded on exchanges or in over-the-counter (OTC) markets. Two segments that are now vying for the attention of retail participants in India are the equity market and the derivatives market. The choice between equity and derivatives trading is not always easy.

Many beginners are enticed by the promise of quick potential profits in the derivatives segment and engage in F&O trading without any awareness. If you are not sure about the choice of equity vs derivatives, this article can help you understand the key differences between equity and derivatives.

What is equity?

Equity, also commonly known as stocks or shares, represents a unit of ownership in a company. In the equity market, companies issue their shares to the public for the first time via an Initial Public Offering (IPO). Once the IPO closes, the company’s shares are listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) and traded in the secondary market.

Some of the key features of equity stocks include the following:

  • Ownership in the issuing company: Each equity stock represents 1 unit of ownership in the company. So, for instance, if a company has 1 lakh outstanding shares and you own 1,000 shares in the company, it means you own 1% of the entity.
  • Risk-reward ratio: The risk-reward proposition for equity stocks is generally skewed in favour of the risk. However, over the long term, many equity stocks have historically delivered benchmark-beating returns. Nevertheless, the returns are not guaranteed.
  • Voting rights: Equity shares give shareholders the right to vote in the company’s Annual General Meetings (AGMs) on matters concerning its future and policies. This benefit is particularly useful for long-term investors who want a say in the company’s growth.
  • Dividend payouts: Some companies may pay a part of their profits to eligible shareholders in the form of dividends. For instance, if you hold 100 shares in a company that declares dividends at Rs. 10 per share, you will earn Rs. 1,000 as a dividend.

Pro tip

Invest in equities, F&O, and upcoming IPOs effortlessly by opening a Demat account online. Enjoy a free subscription for the first year with Bajaj Broking.

demat

What are derivatives?

Derivatives are vastly different equity stocks. They are contracts that derive their value from an underlying asset — which could be an equity stock, a currency pair or a commodity. This leads to different types of securities like equity derivatives, commodity derivatives and currency derivatives.

Derivatives can also be classified as futures and options based on the terms of the contract. Let us see how this works.

  • Futures: In a futures contract, two parties decide to purchase and sell the underlying asset at a specific price on a specific date in the future. This contract must be executed by both parties, and neither party has the right to let the contract expire.
  • Options: An options contract also derives its value from an underlying asset. It gives the holder (or the buyer) of the options contract the right to purchase or sell the underlying asset at a fixed price on or before a specific date. The options buyer is not obligated to carry out the terms. Options contracts can be any one of two types — namely, call options that offer the right to buy the asset and put options that offer the right to sell the asset.

The differences between equity and derivatives

Now that you know the fundamentals of equity and derivatives, let us see how they stack up against one another. The table below shows you the key differences between equity and derivatives.

Particulars Equity Derivatives
Meaning A security that represents ownership in a company and a share of its assets and earnings Financial contracts that derive their value from an underlying asset or index
Risk Generally considered less risky compared to derivatives as the risk is mainly limited to the decrease in stock value Can be highly risky, depending on the type of derivative and leverage used
Potential returns Returns are primarily earned through possible capital appreciation and dividends Returns are based on changes in the underlying asset's price, so derivatives can offer potentially high returns due to leverage
Holding period or investment tenure Can be traded over the short term or held as long-term investments Often used for short-term trading, hedging or speculation as they carry specific expiration dates
Complexity Relatively straightforward, with their value directly tied to the company’s performance and market sentiment Can be complex as the value depends on various factors like the underlying asset, contract terms, expiry and leverage
Leverage Generally, no inherent leverage, but investors may take on leverage separately Often involve leverage, meaning a small movement in the underlying asset can lead to significant gains or losses


Equity vs derivatives: Which segment should you be trading in?

The choice between equity and derivatives depends on various factors like your trading or investment goals, risk tolerance and capacity, level of expertise and market knowledge. If you are a beginner to the financial markets or if you have a low tolerance for market risk but still want to earn market-linked returns, the equity market may be suitable. However, if you are a seasoned trader with a clear understanding of the F&O market and have a high tolerance for risk, you may also consider trading in the derivatives market.

Conclusion

In conclusion, the difference between equity and derivatives lies mainly in ownership, risk exposure, and purpose. Equity represents direct ownership in a company, offering long-term value through capital appreciation and dividends. Derivatives derive their value from underlying assets and are primarily used for hedging, speculation, or risk management. Understanding how both instruments function helps you align investment choices with financial goals, risk tolerance, and market conditions.

Frequently asked questions

Which is better for traders: equity or F&O?
To compare equity and derivatives and make a choice, you need to factor in your risk appetite and risk capacity. Equity trading, although risky, is not as high-risk as F&O trading. So, if you have a high capacity for risk, you may be able to participate in the derivatives market comfortably.
What is the difference between equities in the cash market and derivatives?
When you buy equities in the cash market, you obtain a share of ownership in the company whose stocks you own. When you buy derivatives, however, you hold the right (but not the obligation) to sell or purchase the underlying asset at a specific price and within a specific date.
Is derivatives trading riskier than equity trading?
Yes, derivatives trading without a hedge can be much riskier than equity trading. However, derivatives can also be instrumental in setting off the risk in your equity market positions.
Can derivatives be used to hedge equity investments?

Derivatives can help you manage risk in equity investments by offsetting potential losses. Instruments like futures and options allow you to protect portfolio value against adverse price movements. They act as risk management tools rather than ownership instruments, helping stabilise returns during volatile market conditions.

What role does leverage play in derivatives trading?

Leverage allows you to control a large contract value with a relatively small margin. This amplifies both gains and losses. In derivatives trading, leverage increases exposure to price movements without full capital deployment, making risk management and margin monitoring essential for disciplined participation.

How do returns differ between equity and derivatives?

Equity returns come from price appreciation and dividends over time. Derivatives returns depend on the price movements of the underlying asset within a specific period. Since derivatives involve leverage and time-bound contracts, returns can be higher or lower over shorter durations compared to direct equity holdings.

Do derivatives have an expiry date, unlike equity?

Most derivative contracts, such as futures and options, have a predefined expiry date after which they are settled or lapse. Equity investments do not have an expiry and can be held indefinitely, subject to market liquidity and regulatory conditions, making their holding period more flexible.

Show More Show Less

Disclaimer

1. Bajaj Finance Limited (“BFL”) is a Non-Banking Finance Company (NBFC) and Prepaid Payment Instrument Issuer offering financial services viz., loans, deposits, Bajaj Pay Wallet, Bajaj Pay UPI, bill payments and third-party wealth management products. The details mentioned in the respective product/ service document shall prevail in case of any inconsistency with respect to the information referring to BFL products and services on this page.

2. All other information, such as, the images, facts, statistics etc. (“information”) that are in addition to the details mentioned in the BFL’s product/ service document and which are being displayed on this page only depicts the summary of the information sourced from the public domain. The said information is neither owned by BFL nor it is to the exclusive knowledge of BFL. There may be inadvertent inaccuracies or typographical errors or delays in updating the said information. Hence, users are advised to independently exercise diligence by verifying complete information, including by consulting experts, if any. Users shall be the sole owner of the decision taken, if any, about suitability of the same.
For customer support, call Personal Loan IVR: 7757 000 000

Disclaimer

Standard Disclaimer

Investments in the securities market are subject to market risk, read all related documents carefully before investing.

Broking services offered by Bajaj Financial Securities Limited (Bajaj Broking). Reg Office: Bajaj Auto Limited Complex, Mumbai –Pune Road Akurdi Pune 411035. Corporate Office: Bajaj Financial Securities Limited, 1st Floor, Mantri IT Park, Tower B, Unit No 9 & 10, Viman Nagar, Pune, Maharashtra 411014. SEBI Registration No.: INZ000218931 | BSE Cash/F&O/CDS (Member ID:6706) | NSE Cash/F&O/CDS (Member ID: 90177) | DP registration No: IN-DP-418-2019 | CDSL DP No.: 12088600 | NSDL DP No. IN304300 | AMFI Registration No.: ARN –163403.

Details of Compliance Officer: Mr. Boudhayan Ghosh (For Broking/DP/Research) | Email: compliance_sec@bajajbroking.in, for any investor grievances write to compliance_sec@bajajbroking.in for DP related to Compliance_dp@bajajbroking.in | Contact No.: 020-4857 4486.

This content is for educational purpose only. Securities quoted are exemplary and not recommendatory.

Research Services are offered by Bajaj Broking as Research Analyst under SEBI Regn: INH000010043.

For more disclaimer, check here: https://www.bajajbroking.in/disclaimer

Related videos