Derivatives
Financial contracts whose value is derived from an underlying asset, such as a price or index.
A derivative is a contract whose value is derived from an underlying asset.
A derivative is a financial contract whose value comes from an underlying asset, like a currency, index or commodity. CFDs, futures and options are all derivatives. You can gain exposure to the underlying without owning it, which is how leveraged retail trading works.
How It Works
- CFDs, futures and options are derivatives
- You trade exposure without owning the asset
- Leverage is built into most derivative contracts
Trading Tips
Know what asset your derivative tracks
Read the contract terms before you trade it
Understand that leverage cuts both ways
Derivatives Example
Say you want $100,000 of index exposure with $5,000. Buy one e-mini future on margin instead of $100,000 of shares. Same index move, twenty times the capital efficiency, plus an expiry date shares never have.
How Traders Use Derivatives
Use derivatives for leverage, hedging and shorting, never to dodge learning the underlying. Read the expiry, margin and settlement terms before the payoff diagram. Complexity favors the house.
Related Terms
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