Derivatives are financial instruments based on agreements or contracts and whose value is tied to an underlying asset, instrument, or index. They often play a useful role in hedging and/or managing risk, speculate and earn returns in a relatively shorter duration. They do away with the need to invest a huge sum of wealth upfront and allowing you to avail the benefit from market movements. This gives you greater liquidity than most other assets. They are an excellent way to help you leverage on expected market movements but there is a high element of risk involved.
Benefits of Commodities
Protection from potential looses / Hedging
When used to evade risks, derivative transfers the risks from the speculators who are unwilling to bear the risks, to parties who are willing to bear them. In this regard, derivatives help to distribute risks efficiently between different individuals and groups in the economy.
As an average investor’s knowledge about the stock market is limited, knowing what share to buy? At what time? Becomes a hurdle while investing directly in equity, by investing in blue chip companies the volatility of the share market can be muted to an extent to provide security to the investor funds.
Higher Probability of Returns
Major stock exchanges that aid derivatives trading can earn a considerable amount of profits from this business. One can seek opportunities to reap returns irrespective of market movements.
The ability and chances to make extreme profits is high in derivatives because of the cheap leverage opportunities they provide to the investor.