Investing for Beginners , investing

Derivative Financial Instruments

Derivatives are so called because they are constructed from other traditional securities, and operate the rights to them. Apart from the fact that there are some basic derivative instruments, the variety of them can be unlimited. It is lower number of the standardized securities kinds that are traded on stock exchanges, but the non-standardized derivative financial instruments can even be created by a special-request for the investment client.

As the variety of derivatives is very large, their risk profile is likely to be completely different. Even professional investors are recommended to have not more than 5% risky derivatives of the investment portfolio. Derivative financial instruments can be used for protection from losses (hedging), but it also should be done carefully, because costs of such hedging can overprice the possible profits.

If derivative investments used in amateur hands, they can be very dangerous by bringing excitement: fast results, quick loss or thousand fold profits may pull in the vortex of emotions and don’t let out until everything will be lost. Amateur investment in derivatives is more gambling than a serious investing. Derivatives as investment instrument should be considered only in carefull professional hands.

Investment is most popular in these derivative financial instruments:

• Futures
• Forwards
• Options
• Swaps
• Index Linked Bonds

What others say on Derivatives:

• Derivative Definition | Investopedia
• BBC NEWS | Business | Derivatives - a simple guide
• Derivative (finance) - Wikipedia, the free encyclopedia