What are the advantages and disadvantages of financial derivatives?
Financial derivatives are generally agreed between two parties, and the values of contracts are associated with the values of some basic financial instruments such as stocks or commodities. The use of derivatives can be an effective way for investors to ensure the risks that arose from the purchase of other securities. It can also be a way to speculate on the price of a certain security for a fraction of the cost of actual security. The disadvantage of financial derivatives is that they can be extremely complex and can lead to severe financial losses unless they are done correctly.
Most occasional investors think only about investing in terms of stock or bonds. These are relatively simple tools, but represent only a small part of the available investment opportunities. For more advanced investors, financial derivatives such as options or futures contracts are often valuable for both their flexibility and relatively lower costs. Give it to the same, financial derivativeT derives its value from some basic tool. Derivatives can be effective investment tools, but, like all investments, carry significant risks.
Many investors use financial derivatives primarily as a method of ensuring the risk of other investments they have made. Imagine, for example, that the investor has invested strongly in shares of a certain company. To ensure his risk, he could buy the opportunity known as "Put", which grants the opportunity, but not the obligation to sell the shares of this shares at a predetermined price. In this way, PUT can compensate for the risk of the stock price price.
Investors who prefer speculation about stock prices or other securities can use financial derivatives as a way to achieve this. Derivative contracts can usually be purchased and sold for a small percentage of the actual price. Because this is the case, investors can take over RelatiOutside the small price of the derivative contract and hopes that they reap rewards in the future if the price of basic safety movements in the expected direction.
As with all potential investments, financial derivatives carry significant risks. Derivatives can be extremely complex and the occasional investor may not understand related risks. In addition, many investors use the lever effect to engage in derivatives, which means they basically borrow money from their brokers to invest. Such levers can be particularly harmful if the derivatives work badly.