Derivatives are financial contracts whose value is dependent upon an underlying asset, group of assets, or benchmark.
You may have heard of common types of derivatives such as Options, Futures, Swaps, and Forwards.
These contracts are used for various purposes, such as hedging against risk, speculating on price movements, or gaining access to otherwise hard-to-trade assets.
Derivatives can indeed offer the opportunity for high returns, but it is important to keep in mind that they also come with significant risks such as leverage risk, counterparty risk, market volatility, and the potential for substantial losses due to their complex nature and sensitivity to market fluctuations.
Nevertheless, in understanding how derivatives work, you can be more well equipped to manage financial risk whilst pursuing enhanced investment returns.
Effective use of derivatives can help stabilise portfolios and protect against adverse market conditions, making them a particularly useful option for those interested in more complex financial planning.