What Are Derivatives?
What Are Derivatives?
People are constantly coming up with new and more amazing ways to make (and lose)
money, and the world of stocks is no exception. In addition to proper stock as discussed in
Lessons 4, "What Is a Stock?"
and 5, "The Five Types of Stock," a number of other
stock-like products have appeared in which people speculate and invest. These products,
while not exactly stocks, are directly based on stocks or are otherwise traded in stock
markets. Or, they are derived from stocks. Because of these characteristics, such products
are often referred to as derivatives (derived from-derivatives, get it?). Here are the various
types of derivatives:
Subscription rights
Warrants
Options
Calls
Puts
Stock index options
Since derivatives generally require more expertise and are substantially more volatile than
simple stock transactions, newer investors often avoid them. These same characteristics,
however, are the main reasons why derivatives are particularly popular both with seasoned
experts having substantial sums and with adventurous new investors who have yet to grow
their portfolios.
