The Derivatives Market
There are a lot of different financial markets out there these days and one of the largest is the derivatives market. In fact there is now more money being traded on the derivatives market than there is on the stock market. This comes as a surprise to a lot of people since many are not entirely clear about what the derivatives market is. It is a good idea to learn about it since there are many opportunities there to make money.
The derivatives market basically covers the trading of futures and options. Understanding futures is fairly simple. Futures are a contract in which you agree to buy or sell something at a certain price at a certain time. The thing you buy or sell can be almost anything but is usually commodities or currency although you will sometimes futures traded on stocks as well. Money is made on futures by gambling that the price will be different than the price in the contract. For example if you sell a future contract on copper you are betting that the price of copper will go down before you have to deliver it. That way you can buy the copper for less than you sold it for and make money. The opposite is true if you buy the contract you are hoping that the price will go up so that you can sell the copper you bought for a higher price than you received it for.
The options market is much more complicated than the futures market. There are a lot more factors at play because in this case you are buying and selling the right to buy or sell something else at a certain price on a certain date. Unlike a futures contract where you are obligated to buy or sell the commodity with options you can simply allow the option to expire worthless if you decide that it wouldn't make sense to exercise it. This difference makes options strategies much more complicated than the strategies that are used to trade futures.
A lot of people avoid the derivatives market, in part because they don't really understand it and in part because they think that there is a great deal of risk involved. In truth the risks involved can be very high or very low depending on how you use the derivatives. In fact in many cases they are actually used to reduce the risk on other investments. However the way that most people invest in derivatives is much more risky than trading stocks would be. If you decide that you are going to enter the derivatives market it is important that you make sure that you understand how they work. It is also important to make sure that you understand the risks involved and how to manage them. Used properly derivatives can provide a very good rate of return with an acceptable level of risk for most people.