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.
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
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.
by Daddy Paul7 years ago
I want to know why some people do not invest other than not having enough money to pay the bills. People have views which differ and I would value your opinion.
by yodeler27 years ago
what is derivative trading
by Abhaque Supanjang6 years ago
What kind of investment do you like best to develop your finance ?Some of my friends like to invest their money on gold for an assumption - the price of gold always follow the development of the global economic; some...
by Grace Marguerite Williams3 years ago
How will capitalism evolve within the next 50 years? Will there be a further class divide than itis now? Will the middle class as we know it disappear, with a small upper class and a majority lower class?
by JaxsonRaine5 years ago
http://www.cato.org/pubs/pas/PA692.pdfThis is exactly why I hate the government forcing me to do things through them.This study looked at what private investments would have done compared to Social Security. It broke...
Copyright © 2018 HubPages Inc. and respective owners.
Other product and company names shown may be trademarks of their respective owners.
HubPages® is a registered Service Mark of HubPages, Inc.
HubPages and Hubbers (authors) may earn revenue on this page based on affiliate relationships and advertisements with partners including Amazon, Google, and others.