What is a derivative?

Investing in the stock market is a great way to secure your finances. Over recent years, more and more people have begun to invest in derivatives. A derivative is defined as a financial arrangement or instrument that derives its value from some underlying stock or bond, commodity or other asset. The most common forms of this financial instrument are futures, swaps, options and warrants, as well as certain mortgage-backed securities.

As opposed to being an actual asset, as stocks or bonds are, derivatives are better understood as being a contract: if you buy in, you are buying a promise to eventually take ownership of the asset at a set date. If you buy, what you are doing is betting that the underlying asset will either rise or fall in value, with a certain period of time, in turn taking the value of the derivative with it. For some basic information on derivatives, you can visit the Axiss website.

What are derivatives used for?

While they are used for speculative purposes by some investors, they are also commonly used to hedge or transfer risk.

In recent years, derivatives turnover has increased by huge amounts in Australia. Derivatives are growing in popularity as they are seen as flexible while offering a wide range of investment strategies.

If you want to learn more about derivatives, the Securities and Derivatives Industry Association (SDIA) is a good place to start. The SDIA offers workshops hosted by industry experts in Sydney and Melbourne.