Financial Terms / derivative

Reduce Risk with Derivative Trading

Derivatives are contracts between two parties, whose value is derived from an underlying asset, such as stocks, bonds, currency, commodities, and interest rates.

What are derivatives?

Derivatives are a type of security that are bought and sold on an exchange.

How are derivatives bought and sold?

Derivatives are bought and sold on an exchange.

Key Points

Derivatives are Complex Financial Securities
Derivatives are a type of financial instrument that are used to access specific markets and are traded on exchanges or over-the-counter. They can be leveraged and used to hedge against risk as well as speculate on the price of an underlying asset.
Derivatives are Used to Access Specific Markets
Derivatives are used to access markets that may otherwise be difficult to enter. By using derivatives, investors can gain exposure to certain markets without needing to buy the underlying asset.
Derivatives are Traded on Exchanges or Over-the-Counter
Derivatives can be traded on exchanges or over-the-counter (OTC). Exchanges are regulated by a governing body, while OTC trading is done between two parties without a middleman.
Derivatives are Leveraged
Derivatives provide leverage, meaning investors can control a larger position with a smaller amount of capital. This leverage increases both potential profits and losses.
Derivatives are Used to Hedge Risk
Derivatives can be used to hedge against risk by providing protection from adverse price movements in the underlying asset. This can be useful for investors who want to limit their exposure to downside risks.
Derivatives Can Be Used to Speculate on the Price Movement of an Underlying Asset
Derivatives can also be used to speculate on the price movement of an underlying asset. Investors can take a position on the direction of the asset's price without having to actually own the asset.
Futures Contracts are Agreements to Buy and Sell an Asset at a Future Date
Futures contracts are agreements to buy or sell an asset at a predetermined price at a future date. These contracts are commonly used in commodities markets, but can also be used for other financial instruments such as stocks and bonds.

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