Derivative Trading - Types, Advantages & Disadvantages

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Derivative | December 13

What is Derivative trading list its benefits?

Derivatives are financial instruments which derive their value from the underlying assets. There are a variety of underlying assets in derivatives such as equity shares, commodities, currencies, and interest rates.

Derivative trading is the buying and selling, hedging and speculation of derivatives. These derivatives derive their value on the basis of the price, volatility, and risk of an underlying stock, bond, commodity, interest rate, or currency exchange rate.

If you want to enjoy the benefits associated with derivative trading, you need to formulate and implement effective derivative trading strategies. For this, I suggest that you should seek guidance from a financial expert.

You can indulge in derivative trading in two major types of markets, which include:

Exchange Traded Derivatives

Over the Counter (OTC) Derivatives

Benefits of Derivative Trading

Trading in derivative instruments has a number of benefits, such as:

Risk Management

Derivative trading enables you to manage risk effectively by allowing you to identify the desired and actual level of risk.

Highly Leveraged

By investing in futures, an investor gets the benefit of trading in the value of stocks higher than the original stocks. This can increase their profits significantly if the stocks move accordingly.

An investor putting money in futures can pay a margin as low as 10% of the value of the contract at the original time of investment.

Liquidity

In the case of derivatives, especially, futures, there are a large number of buyers and sellers usually. This makes derivative trading quick and results in the high liquidity of these financial instruments.

Hedging

Derivative trading reduces the risk of adverse price changes of an asset. You can leverage a future contract to prevent the losses incurred in case of a decrease in the stock price of your shares. Many investors use this technique to stay protected.

If you want to add something about derivative trading and its benefits, please mention in the comments below.

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