What are derivatives in finance?

1. 83

   scoopposted 11 years ago

   What are derivatives in finance?

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2. 67

   LandmarkWealthposted 11 years ago

   A derivative is a contract between to parties that have a set of conditions that each must abide by to make a payment or delivery of a security.  The options market for example allows you to buy and sell puts & calls.  These allow you to excercise a contract that can give you the right to buy or sell a stock at a specific price within a specific time frame.  It's a but more complicated than this explanation, but that is the basic answer.  There are derivatives that trade in the futures market on commodites, as well as various other forms of derivative investments.   The single biggest benefit is the ability to make an investment with less of a capital committment.  The downside is there is a time value that has an expiration associated with it.  You generally should be a bit more experienced before buying or writing puts & calls.

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   paul pruelposted 11 years ago

   In finance, a security whose price is dependent on or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties, with a value determined by fluctuations in the underlying asset, which could be stocks, bonds, commodities, currencies, interest rates, and market indexes. Most derivatives are characterized by high leverage. For more details visit the link: http://financial-dictionary.thefreedict … Derivative

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4. 60

   SteveSpencerposted 11 years ago

   Think of it as an investment within or from another investment... It is derived from the primary product.
   
   So a share of Apple stock is a
   Security you can trade. But you can also purchase the option to buy/sell a share of Apple at a given price within a given time. This option is derived from the primary security, Apple in this example, and is a derivative investment.
   
   This works the same way in debt instruments (bonds, mortges, etc). A loan is a primary instrument but if we break that loan up into segments and bundle it with other loans to create a CMO (collateralized mortgage obligation) the CMO is a derivative of the initial loans.
   
   It's a tricky topic; hopefully this helps.

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