Derivative |
December 13What 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.
