Derivatives, in simple terms, means the financial instruments which derive their value from the underlying. The underlying could be a share, an index, an interest rate or a currency. In India, in the share exchange segment, we have two markets in operation. One is the cash market and the other, is the F&O market.
The cash market is easy to understand as it indicates the buying/selling of shares at the current market price.
When you visit the NSE India website, you see more than 1300 companies’ shares have been listed and are being traded, but then, in the F&O space, you see only about two hundred securities. This raises the important question- What qualifies security to be added to the F&O segment?
Securities and Exchange Board of India (SEBI), the primary body to regulate capital markets in India, has laid down the criteria for the introduction of stocks in the derivatives segment. They are as follows –
The important point is that the above criteria need to be met for a continuous period of 6 months.
The NSE keeps monitoring and adding new scrips to the F&O space from time to time. If you follow the news, you could see many such inclusions being made from time to time. The list of stocks trading in this segment can be accessed from the NSE website.
Now that we have understood how security gets added to the F&O space, let us also know when security is removed.
If a stock is not in conformity with any of the above-mentioned criteria, the exchange removes it from the segment. What this essentially means is that this stock has lost its liquidity in the eyes of the Exchange and is not fit for the derivatives segment.
Please note that removal from the F&O segment is not the same as an F&O ban. An F&O ban is temporary, a span of a few days, but a stock excluded from the F&O space needs to meet the above criteria for a period of six months to have a chance of re-entry.
It is mainly in the interests of investors and to maintain the transparency that the Exchange removes stocks that don’t meet the criteria from the F&O space.
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