The term “Derivative” indicates that it has no independent value, i.e. its value is entirely “derived” from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities.
With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the definition of Securities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as:- A Derivative includes: -
A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
A contract which derives its value from the prices, or index of prices, of underlying securities;.
A company organises money to do business with through borrowings and owners contribution. The owners contribution is called equity capital or simply equity. Equity is accumulation of small, equal amounts against which the company issues certificates, which are called shares, stock or again equity. Shares have indefinite life with a face value, which can be changed if the shareholders decide, and no guaranteed return.