There are some ways to make a little bit of money using the power of derivatives and its assets using some standard, as well as other more creative means.
Here’s the landscape – activity in the global OTC (over-the-counter) derivatives markets fell in 2015, from $629 trillion in end December 2014 to $553 trillion at end June 2015, and floundered at that amount for a while. Note that market data for end December 2015 has not been released yet.
While the market fell by a relatively significant amount, it is only because the world markets have been hit by the slumping oil prices, which affects nearly the entire market of stocks and derivatives. If you’ve heard, 2016 is the year where the world might slump into a global recession too.
That said, the derivatives market is still HUGE. $553 trillion dollars circulating in the market by end June 2015. Just imagine if you could grab a mere 0.01% of that pie. You’d still be a multibillionaire!
Alright, now that we know that the market still has a lot of money to be made in derivatives, let’s start grabbing some of that!
The very first rule in investing in these derivatives is to understand what you buy. This point cannot be emphasized enough! If you’re crazy about fitness, you can consider looking at derivatives from the health and fitness category.
Why would you look at vehicle stock derivatives if you know nothing about the industry? That would be a huge disaster. At the very least, some research has to be done about a potential industry you’re looking at.
Options Trading 101: How to Invest in the Derivatives Market
The next thing to understand is, of course, the derivatives you’re looking at. There are several types of derivatives in the market, and a few are accessible to the commercial, retail investors. Try to stick to one at the start before branching out.
Yes, there is money to be made for both, but all the money to be lost if you only have half-knowledge of the financial instruments you’re handling.
While derivatives are linked to some stocks or indexes, they do not behave the same as stocks do i.e. if a stock with strong fundamentals has a price drop, it can usually recover. Derivatives are usually short-term investments, ranging from 1 week to 3 years, but retail investors hardly ever go beyond a month, and thus, fundamentals don’t really matter a lot.
That said, usually it would be a better bet to also know about the industries you’re buying the derivatives from – understand the nature of the industry: if it is cyclical, or what it is affected most by, as well as the overall trend of the industry.
The next thing to know when investing in derivatives is to never get emotionally attached to a derivative of a certain asset. Basically, if you’re investing in a derivative of a certain stock, you might get a lucky streak and make money for several weeks or months off it! This can usually make anyone associate this particular derivative as a good luck charm, or a sure-fire way to make money.
What happens if the stock or industry goes volatile? If you decide to hold a future for this, your blood pressure will also rise and fall with the price movements.
Derivatives are financial instruments for the sound, logical mind: if you observe that the market trend is down and can reasonably predict that your derivative will start making losses, you have to know when to hold, or when to pull out of it.
To be successful in making profits consistently in derivatives, one must continually be learning about options, as well as learning from mistakes made. Trust me; everyone will make a losing trade. Even the best Wall Street investors and traders have made mistakes. Heck, even Warren Buffett has.
Don’t be afraid of making mistakes, but also be sure that you’re making an informed decision to buy or sell a derivative based on your own research and findings. The worst thing to do in this case is to listen to someone else who offers you ‘hot market tips’ and ‘guaranteed money making derivatives’.
These people probably are better off gambling that money away, because that is precisely what they’re doing by suggesting things without knowing any underlying information.
As you become more experienced about options and more level-headed in picking your derivatives, you’ll develop your own system of research as well as technical and fundamental analysis of derivatives and stocks. By this time, you’ll be experienced enough to know which would make a good investment that offers decent returns, or which will turn into a bust and cause you to make a losing trade.
Find a reputable broker around your area, like Optionsxpress, which offers great returns and lowered derivative commissions. Ultimately, you should find a broker that suits your needs and is aligned with what you want to achieve, rather than merely the benefits they offer.
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