What is a derivative contract?

Derivatives are contracts between two parties that specify conditions (especially the dates, resulting values and definitions of the underlying variables, the parties' contractual obligations, and the notional amount) under which payments are to be made between the parties.

What are the different types of derivatives?

Derivatives are usually leveraged instruments, which increases their potential risks and rewards. Common derivatives include futures contracts, forwards, options, and swaps. A derivative is a complex type of financial security that is set between two or more parties. Traders use derivatives to access specific markets and trade different assets.

Do derivatives have to be acquired?

The underlying asset does not have to be acquired. Derivatives therefore allow the breakup of ownership and participation in the market value of an asset. This also provides a considerable amount of freedom regarding the contract design.

Are derivatives a form of advanced investing?

Typically, derivatives are considered a form of advanced investing. The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes.