Sumary of What to know about derivatives and how they allow investors to hedge, leverage, and speculate:
- Derivatives are contracts that derive their price from an underlying asset, index, or security.
- Another type of investment vehicle that you may not be as familiar with is derivatives.
- While all investing in the stock market comes with inherent risk, some types of investments tend to be riskier than others.
- TOP VIDEOS FOR YOU There are two types of derivatives: over-the-counter derivatives, which are negotiated privately, as well as standardized derivatives that can be traded on a standardized exchange.
- “Derivatives are unlike securities in that they are more of a bet than an investment.
- Most common derivative contracts have an expiration date, which means a limited time for them to achieve a profit,” explains Asher Rogovy, an SEC registered investment advisor and chief investment officer at Magnifina.
- If a trader has conviction about a price move within a certain time frame, they can gain a much higher profit by trading derivatives instead of the underlying security.
- Some common types of derivatives include: Options – this type of derivative allows the investor the option to buy or sell a security at a set price with a specific timeframe.