What is a derivative?

Do you know that most of the trade in the world is in derivatives?

What are derivatives?
What are the types of derivatives?
Is Trading in Derivatives Right?

Today we will know the answers to these questions in this article

Friends, on our first question,

What is a derivative?

Derivative means financial contract whose value is derived or based on the underlying asset or the underlying. Derivatives can be used for either risk management (hedge) or for speculation.

Friends, the price of each derivative depends on its underlying. If the price of the underlying asset rises, the value of the derivatives based on it will also increase. If the price of the underlying asset decreases, the value of derivatives will also decrease.

For example, we should know that sugar is derived from sugarcane, so we would say that sugar is a derivative of sugarcane, and sugarcane is an underlying asset of sugar. When the price of sugarcane rises, the price of sugar in the market also increases, similarly when the price of sugarcane falls, the price of sugar also falls.

Similarly, the stock market consists of financial derivatives. Their underlying assets are Stock, Index, Currency, and Commodity. As the price of this underlying asset changes, the value of derivative based on it also changes.

Let us move on to another question.

What are the types of derivatives?

There are four types of derivations.

1. Forwards
2. future
3. Options
4. Swap

If we buy or sell a stock of a company, it is called stock trading. But if we buy or sell derivatives of stock without buying shares, then we will say that derivatives are trading, not stock trading.

For example, if we buy a future of Infosys stock instead of buying shares, it would say that it is Future trading.

Similarly, if we buy an option of it, we would say that it is Option trading of Infosys stock.

Now let us go to our last question,

Is derivatives trading correct?

So, friends, this question is difficult to answer, it depends from person to person. Most long term investors who want to earn money in a long time, don't do much work or not at all in derivatives trading.

But let us talk about traders who want to earn big profits in the short term, derivative trading is very important for them. And there are also many traders who do derivative trading only.

So friends, it depends on you, which way you want to earn from them. choose the only way you are able to earn money easily.