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Financial Derivatives Investing


Investing in the stocks and securities is a risky deal. Unless you are adept in the paradigm, you stand to lose considerable figures within a short time. This is a very reason why a small share of the investors tends to ignore stock market investments. They cannot afford to lose their hard-earned savings and would resume with their search for appropriate investment modes. Here is something that would brighten up their day - financial derivatives investment. What is a derivative and how is it beneficial to the average investor? Why do experts consider derivatives as a risk-free venture?

Instead of explaining the situation in economic terms, allow me to cite a suitable analogy. You wish to purchase some oranges from the nearest grocery store. Two options materialize - you can straightaway go and purchase them, or you can call up the store and ask the clerk to keep some oranges aside (reserve the purchase) so that you may come and collect them shortly. Financial derivatives are all about the second step mentioned over here. You need not make any purchases; you are just required to commit and make the payment eventually. Whether to stay away or to complete the transaction is at your discretion!

Enough with oranges and grocery stores! Let us get down to some serious business-talk. In financial derivatives, two parties get into an agreement. The interested party (buyer) will have to make small and nominal payments in order to convince the other party (the seller). Underlying is the term used by economists and stockbrokers for the commodity or security for which the agreement is laid out. In a stock market environment, it will be the stocks or shares of a company. In the foreign exchange markets, it can be a currency.

If you are engrossed in trading using financial derivatives, you must be aware of certain terminologies such as futures and options. Instead of spending high sums, the interested investor can "control an item of much larger value" using nominal or meager sums. Forward contracts are the most common type of financial derivatives instrument that is agreed upon by the seller and the buyer. In this paradigm, the parties can forfeit the agreement any time. This provides a risk-free environment for them, as the buyer need not invest on the securities at a loss and vice versa. Brokers and investors do not trade with forward contracts in the stock exchanges.

On the other hand, if you wish to trade utilizing the policies set by the stock exchange, you must be on the look out for a futures contract. As mentioned earlier, the seller is not at risk because the purchaser must make some deposits. What are options when it comes to the financial derivatives? Options will enable both the parties to move on with the agreement before the predetermined date. Why wait for a future date when the market is displaying a growth? Any stock market investor will be aware of the fact that he or she must make use of the favorable market situations to cash in the profits!

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