What are Financial Derivatives?

Financial derivatives are a bit more complicated than stocks and bonds. They are fairly new and require some concentration to understand. If you interested in investing in financial derivatives, make sure you have a good understanding of them, as you should with any investment.

A financial derivative is a contract.

When you invest money into a derivative, you aren’t buying ownership or debt, you are buying into an agreement.Derivatives aren’t stocks, but they often involve stocks.A derivative is a contract to buy or sell another security at some point in the future.

Types of Derivatives

There are several different categories and types of derivatives available. Two of the most common derivatives are futures and options, but also include forwards, SWAPS, warrants, etc.

Options

Options are most often given to employees. They are an agreement that the buyer can buy or sell a security at an agreed upon price in the future. They have the option and are not obliged to do so. It is called a ‘call’ when they have the right to buy, and a ‘put’ when they have the right to sell. These options are most often given to employees when a company first issues stock.

Futures

Futures are similar to options in that it is an agreement to buy or sell something in the future.The difference is it isn’t optional.With a future, you agree to buy or sell at a specified time in the future.

Derivatives can be just as risky as stocks, but they are also very complicated.The great investor Warren Buffett refuses to invest in derivatives because he believes he can do better with stocks and that derivatives will ultimately lose you money.

Whether or not you should invest in them depends on what kind of investing you are interested in and if you feel derivatives are a good investment. Learn more about them and find out everything you can before you throw any money into it.