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Derivatives

Definition

A derivative is derived from the value of an underlying investment, hence the name. There are financial derivatives based on many types of underlying instruments, benchmarks and products. For example there are derivatives based on stocks, commodities, real estate, the inflation rate, market benchmarks, etc.

Using the term Derivatives :

In order to amplify potential returns, Don Daningforth, the Portfolio Manager to the Stars, likes to utilize derivatives such as buying call options. This way he can really leverage his position and amplify returns. Unfortunately, Don didn't read the sage advice of the Investonym.com team and failed to hedge his position. The market went against him and he lost a significant amount of money. Don is now the FORMER Portfolio Manager to the Stars.

Pay Special Attention To :

Derivatives implicitly involve leverage as they allow the holder to control a large amount of the underlying with a comparatively small investment. Leverage implicitly means increased risk (but also an increased opportunity for higher returns). When dealing with leverage, you must be careful and professional and experienced investors will often employ hedging tactics in order to reduce their exposure to loss.

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Related terms

Forwards , Futures , Options , Swaps

'Derivatives' appears in the definitions of these other terms:

Heating Degree Day