Derivatives

Derivatives are a general terms for financial instruments that derive their value from something else. The term became popular in the early 1990's, unfortunately, based on some large losses in derivative trades.

The two main types of derivatives are futures and options.

Derivatives are highly leverages trades which can contain high amounts of risk. However, the origins of derivatives are as hedging tools.

You are probably wondering how does this stuff matter to your life? Wouldn't you like to be able to listen to the evening news and be able to profit from it? Maybe you are planning a vacation to Europe and want to protect yourself from currency fluctuations. Or you just want to be able to hold a conversation at a cocktail party.

The internet has opened up many of these types of trades to everyone. Years back the forex market was controlled totally by banks and other financial institutions. Now anyone can start trading foreign currency for as little as $25.

Or maybe you want to profit from the stock market swings that you hear about all the time; and with these products you can profit whether the market is moving up or down, however you may not have the several thousand dollars to risk but you can get started with BetonMarkets.com and start profiting and learning skills that you can expand into broker based accounts.

The futures markets allow you to profit and protect yourself from fluctuations in oil prices and other commodities.

Options allow you to use leverage to either participate in a stock's movement or protect the price on a stock you already own.

As you can see these products offer a lot of flexibility. While they may not be for everyone and there is certainly risk involved and you should not risk anything you can't afford to lose this is important general knowledge to have.

Betonmarkets.com is a way to trade contracts similar to options starting with as little as $25. The contracts they offer allow you trade major indexes and other products. This allows you to start tracking markets and getting a feel for how the markets move with only risking a small amount of capital.

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An options contract is entered into by a buyer and seller who agree that the buyer has the option but not the obligation to sell a certain item and a certain price on a specified date in the future. Options are currently traded on stocks, stock indexes, financial instruments, futures, and other items. The basic concepts of options work the same no matter what the underlying asset. For example purposes I will use stock options as that is my primary interest however, the principles will work for any type of option. The buyer of an option has rights and the seller of an option has obligations. There are two types of options; one is a call the other is a put. The buyer of the call option, has the right to purchase 100 shares of the underlying stock at a certain price by a specific date in the future. The seller of that option has the obligation to sell the stock in the future at the price determined by the option. A put option gives thebuyer of the option the rights but not the obligation to sell 100 shares of stock at a specific price by a certain date in the future. The buyer of the option pays a premium for that right and the seller gets to keep the premium. When you buy an option your risk is limited to what you paid for the option when you sell the option your risk is unlimited.

Options can be used for several different purposes both to protect against stock you own or are thinking of purchasing or to use leverage to profit from a move on the stock without actually owning the underlying security.

For example, you want to buy 100 shares of XYZ stock which is currently trading at $24.50 but you don't have the cash right now to buy the stock. You could buy an option right now that would give you the right to buy the stock at $25 up to a certain point in the future. You will need to pay for this right but you don't need to worry about missing the opportunity. If the stock goes down, your option is worthless and you can buy the stock in the open market for less money. If the stock goes up you can still buy it for $25 no matter what it is trading at that day. If the stock does run up you may just choose to sell your option in the open market instead of excercising it into stock. This is where leverage can come in to play. You can buy several options for a lot less than the stock and will still participate in gains but your loss is limited to what you paid for the option. However, one thing to always remember is that your option is a decaying asset that will lose value over time and can eventually be worthless where as once you own the stock it is your forever.

Futures contracts are contracts that are entered today for delivery in the future. Futures are traded on a number of different items such as pork bellies, coffee, cattle as well as non-physical items such as bonds and currency. There are several different players in the futures world. One may be the farmer who wants to lock in the price he sells his grain for. Another may be the cereal maker who wants to protect his costs of aquiring wheat. Those users of futures would be known as hedgers, as they are hedging their need for the physical commodity. The other players in the futures market are the speculators who are buying and selling futures contracts with no interest in the actual underlying product but rather hoping to profit off of the fluctuation in pricing. The speculator plays an important role in the market by providing liquidity in the market for the hedgers.

Forex? What is it, anyway?



The market

The currency trading (FOREX) market is the biggest and fastest growing market on earth. Its daily turnover is more than 2.5 trillion dollars. The participants in this market are banks, organizations, investors and private individuals, just like you. (click here to read full market background by Easy-Forex%u2122).



The goods (merchandise)

Markets are places to trade goods, and the same goes with FOREX. The Forex goods are the currencies of various countries. You buy Euro, paying with US dollars, or you sell Japanese Yens for Canadian dollars. That's all.



How does one profit in Forex?

Obviously, buy cheap and sell for more! The profit potential comes from the fluctuations (changes) in the currency exchange market.

The nice thing about the FOREX market, is that regular daily fluctuations, say - around 1%, are multiplied by 100! (in general, Easy-Forex%u2122 offers trading ratios from 1:50 to 1:200).



How risky is Forex trading?

You cannot lose more than your "margin" (your initial investment)! You may profit unlimited amounts, but you never lose more than what you initially risked. However, risk only what you can afford and is not vital for your well-being.



How do I start trading?

Register (Easy-Forex%u2122 offers the simplest and quickest registration process, no obligation); deposit your first trading "margin" amount (credit cards are welcome, only by Easy-Forex%u2122); start trading.



How do I monitor my Forex trading?

Online, from anywhere, anytime. You have full control to monitor status, check scenarios, change some terms in the deal, or close it.



Want to know more? Want to get on-line training? Register here (quick, no obligation), we'll be glad to guide you, every step of the way.



Good luck!



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Please note that derivatives such as options and futures contain large amounts of risk. This LENS is here to provide general knowledge but makes no recommendations as to whether you should trade options or futures.