What are derivatives?

Derivatives are financial instruments that are "derived" from the value of the underlying asset. Typically, investors use it to hedge or guard against risk. A derivative is a form of speculation about the future value of an asset (usually an underlying asset, such as a stock or bond). For example, if you speculate that the stock price will fall quickly, you can still achieve some returns in the case of a decline.

Where have you heard about derivatives?

It's possible everywhere. Since the 1980 s, derivatives have often made headlines, with good and bad content. Derivatives are seen as one of the reasons for the global economic downturn in 2008. However, derivatives are still widely used by investors looking to profit from large fluctuations in stock prices.

What you need to know about derivatives...

Derivatives may be linked to price movements in assets such as stocks, bonds, currencies and interest rates, but they may also be linked to inflation, house prices and even weather.

Strictly speaking, there are only three types of derivatives: futures Contracts it also includes forward and option contracts. Futures and forward contracts are essentially the same, but forward contracts are expected to deliver the underlying asset, while futures contracts are not.

A futures or forward contract is an agreement to purchase an asset at a given price on a given date. An option provides its owner with such a right to purchase, but the owner is not obliged to purchase it.

Swap Contracts swap contracts are not technically derivatives, but they are widely regarded as derivatives and involve the exchange of financial instruments.

Contracts for difference (CFD) have many of the characteristics of derivatives, such as allowing traders to take a position on the underlying asset.