The New Savvy delves into the mechanism of derivatives investing, an alternative way to trade on the market. Learn more about these sophisticated investment vehicles and why they may represent an opportunity for highly experienced investors with well-developed portfolios. Explore the potential advantages, risks and contracting process as you weigh up your overall strategy.
Derivatives are types of investment agreements that derive their value based on an underlying asset such as a stock or security. These contracts stipulate that an asset owner agrees to sell, and a buyer agrees to buy at an agreed price on a certain future date. The investor does not own the asset at the time of contracting but is putting down money with another party as a sort of wager on how the price of the asset will change.
Derivatives investing has traditionally been the domain of institutional investors or high net-worth individuals. Any woman considering derivative investment must be fully aware of how this type of investment works. Comprehensive insights into the meaning of terms like futures, forwards, fair value, call options and put options are essential – The New Savvy will explain them.
A buyer must look closely at the price, fees, the time limitation after which the derivative becomes worthless, lot sizes and trading cycle of a proposed offering. It’s essential to analyse the potential risk of a derivative and what impact it may have as a moving part within all the wheels and cogs of your financial plan.
The New Savvy discusses some of the reasons why sophisticated investors consider buying derivatives. For example, leveraging investment value has the potential to be profitable in a volatile market. Protecting against the chance that a stock’s price will fall, a strategy called hedging, can be achieved with certain contract types. Investors interested in speculating – investing their money on the chance that the value of an asset will increase – are likely to consider derivatives investing.
So if you think you may be a candidate for derivative investment, or are just plain curious about how derivatives work, look no further. Start with The New Savvy to add some new financial education to your knowledge portfolio. Be sure to consult with your financial planner if this section of The New Savvy intrigues you. In any case, enjoy in the meantime your research into the potential power – and pitfalls – of derivative investing.