If big plans are made for life and you want to make a big fortune, you need to constantly evolve.
In the field of finance, there are many terms that a beginner does not understand. Recently, we presented an investor dictionary, and in this article we will consider another complex concept.
What are financial derivatives? Looking through the news, doing trading or reading educational materials, you should have met such words as financial derivatives or derivative financial instruments.
It is not enough to know the designation of these words, you still need to understand what they are used for and how they can be used.
The general explanation goes like this - these are exchange contracts under which you take obligations (get the right) to perform certain actions with a certain share of the underlying asset.
Most often it’s about selling or buying assets at a fixed price, but other options are possible.
If a contract on an exchange requires signing by both parties, then financial derivatives are formal.
They are concluded by simply pressing a button in the terminal. Derivative financial instruments are used as assets on the exchange , they are bought and sold (some are pressed for speculation).
Initially, financial derivatives were created to hedge risks, but are now also used for speculative earnings.
As for their legality, everything depends on the state in which you are located. By law, in some countries derivative financial instruments are classified as securities .
They are bought and sold on stock exchanges before the settlement period. There is a profit in the purchase of financial derivatives, but a subtle calculation is also required here.
When entering into financial derivatives, the underlying asset is always used. This can be anything from securities and currency pairs to stock indexes.
With the advent of new assets, new derivative financial instruments appear, their number increasing every year.
Transactions are conducted with derivatives in various markets, as a rule, they are concluded by ordinary traders. The cost is only occasionally higher than the price of the underlying asset, basically it is up to 10% .
Volatility in such a market is much higher than in the market of basic assets, therefore, it is more interesting to conduct transactions here. It is also worth noting that this is one of the best tools for hedging risks.
The derivatives market is attractive with increased profitability, but do not forget about the risks, here they are increased.
All derivative financial instruments can be divided according to various parameters. The accepted types are futures, options, forwards, CFD contracts, swaps. There are many other types of derivatives, but mainly these are used.
We hope that this article has helped you understand what financial derivatives are and why they are used. In conclusion, we will only recommend an article about the diversification of the investment portfolio - another important concept in the financial sector.
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