What I believe has been the absolute market revolution since shares.
Derivatives might sound complicated and something you would hear from a professor or a know-it-all businessman – but they’re really not.
I am no academic or even remotely one of the smartest guy’s in the world. And if I can grasp the idea and understanding of derivatives, I pretty much guarantee you will too.
Also, if you want to take trading seriously and really make a living with it, you’ll need to understand derivatives trading sometime in your career.
That’s where MATI Trader comes in…
In the next few weeks, I’ll be sending you a series of articles on everything you’ll need to know about CFDs and Spread trading derivatives – Starting with this one…
Make sure you add us to your email address book and set a reminder for every Monday at 7:30am.
Let’s start at the very beginning.
What is a derivative?
– Collins English Dictionary –
‘A derivative is an investment that depends on the
value of something else’
When it comes to trading, a derivative is a financial contract between two parties whose value is ‘derived’ from another (underlying) asset.
Let’s break that down more simply:
- A derivative is a
- financial contract (CFDs, Spread Trading, Futures, Forwards, Options &Warrants)
- Between two parties (the buyer and seller)
- Whose value (the market’s price)
- Is derived (depends on or comes from)
- Another underlying asset (Share, index, commodity, currency, bond, interest-rate, crypto-currency etc…)
You’ll find that the derivative’s market price mirrors that of the underlying asset’s price.
NOTE: As there are a number of different derivatives you can trade nowadays, we will ONLY focus on CFDs and Spread trading in the next few weeks, as those are the only ones I trade with MATI Trader.
Why trade using derivatives?
The absolute beauty about trading derivatives is that they are a cheaper and a more profitable way to speculate on the future price movements of a market without buying the asset itself.
You don’t get all the benefits with derivatives
What’s probably important to note with derivatives, is this.
When you buy a derivative’s contract, you’re not actually buying the physical asset. You’re simply making a bet on where you expect the price to go.
When you buy actual shares of a company, means you’ll be able to attend AGMs (Annual General Meetings), Vote and claim dividends from a company.
When you trade derivatives on the underlying share, means you’ll be exposed to the value of the shares and the price movements – and that’s it!
As a trader, when you buy or sell a derivative, you’re not actually investing in the underlying asset but rather just making a bet (speculation) on where you believe the market’s price will head.
This gives you the advantage and opportunity to:
Buy low (go long) a derivative of the underlying asset and sell it at
a higher price for a profit or
Sell high (go short) a derivative of the underlying asset and buy it back at a
lower price for a profit