Derivatives are financial contracts that get their value from something else, like a stock, bond, or commodity (like oil). Imagine a contract to buy a bushel of wheat at a certain price in 3 months. That’s a derivative.
They are used for two main things:
•Hedging: Protect yourself from price swings. A farmer might use a derivative to lock in a selling price for their crops.
•Speculation: Betting on price movements. You might buy a derivative hoping the price of oil will go up.
Options: Give you the right, but not the obligation, to buy or sell something at a certain price by a certain time. Like having the first chance to buy a toy at a set price.
Futures: Agreements to buy or sell something at a specific price on a specific date in the future. Like agreeing to buy concert tickets months in advance at a fixed price. Swaps: Think of it like a financial bartering agreement. You agree to trade cash flows with someone else, based on different interests. For example, you might trade your fixed interest payments for someone else’s variable ones.
Derivatives charges are calculated using market spread which is the difference between the bid and ask price
Yes, derivatives can be useful for investment portfolios, but be cautious:
•Hedge: Like an umbrella, protect from price drops.
•Boost returns: Act like a magnifying glass for gains (and losses).
•Earn income: Some can generate income.
•New markets: Access new investment areas.
Here’s the difference between buying a commodity directly and an ETF tracking it:
•Direct Purchase:
– You own the physical commodity (gold bars, oil barrels).
– Requires storage, insurance, and managing delivery.
– Not ideal for most investors.
•ETF:
– You own shares in a fund that tracks the commodity price.
-Easier to buy and sell like a stock.
-No storage hassles.
No options contacts can be traded in the same equity account
Yes account manager will assist you.
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1.Leverage: Derivatives can magnify your gains and losses. Imagine a seesaw – a small move can lead to a big swing.
2.Complexity: Derivatives can be complex financial instruments. It’s crucial to understand them fully before using them.
3.Counterparty risk: There’s a risk the other party in your derivative contract might default, leaving you on the hook.
4.Market risk: Derivative values are tied to underlying assets. If the market moves against you, you could lose significant money.
5.Liquidity risk: Some derivatives might be harder to buy or sell quickly, making it difficult to exit a position when you want.
Leverage in derivatives is like using a magnifying glass on your investment. Here’s why it increases risk:
– Small move, big impact: A small price change in the underlying asset (like a stock) can lead to a much bigger gain or loss in your derivative position due to leverage. Imagine a small tilt on the seesaw causing you to jump high or fall hard.
– More money to lose: With leverage, you’re often controlling a larger position with less of your own money. So, if the market moves against you, you could lose a much bigger chunk of your own capital compared to buying the underlying asset directly.
Derivatives are significantly less stable than stocks or bonds.
•Stocks and bonds represent ownership (stock) or a loan (bond) to a company or government. Their value fluctuates, but they are generally considered investments with a track record of growth over time.
•Derivatives get their value from something else, like a stock or bond, and can be much more volatile due to leverage. They can magnify gains, but also magnify losses.
Derivatives charges are calculated using market spread which is the difference between the bid and ask price
Just keep in the account 25% of the mentioned margin % intact and yes there are Swap fees imposed on some products. Margin requirements and Swap fees differ based on the traded asset class
Picking derivatives is tricky! Here’s why:
1.For experts only: Best suited for experienced investors due to risks.
2.Learn the basics first: Understand options, futures, swaps and their uses.
3.Research what matters: Know the underlying asset (stock, etc.) that the derivative is based on.
4.Plan your moves: Have a strategy for entering and exiting trades, managing risk. Consider consulting a professional.
5.Practice first: Try a simulator before using real money.
1. Think protection first: Use derivatives to shield your investments, not gamble for big wins.
2. Start small and basic: If you’re new, stick to simple options or futures, avoid complicated stuff.
3. Baby steps: Begin with small amounts to limit losses while you learn.
4. Have an escape plan: Always set stop-loss limits to control potential damage.
5. Get help for anything fancy: If you want complex strategies, consult a pro who knows derivatives.
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Shaky economy can make derivatives trickier:
•Market swings: The ups and downs can be bigger, making derivatives riskier.
•More hedging: People might use derivatives more to protect themselves in uncertain times.
•Costlier to use: Brokers might require more money upfront to trade derivatives.
•Prices change: The price of the derivatives themselves can be affected by the economy.
