How can derivatives be used

Trading derivatives, what should you watch out for?

Do you want to trade derivatives? You may have heard the term derivative before. Here we explain what a derivative is and what its use is.

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  1. What are derivatives?
  2. Where are derivatives traded?
  3. Types of Financial Derivative Instruments
  4. Why invest in derivatives?
  5. What costs should you consider?
  6. What are Unsecuritized Derivatives?
  7. Advantages and disadvantages of trading derivatives
  8. Frequently Asked Questions: Trading Derivatives

What are derivatives?

A derivative is simply explained as follows: It is a financial product, the development and price of which depends on another, for example on a share. The value of this product is called the base value. When you own a derivative, you speculate on whether the price of a product will rise / fall in the future. With a derivative, you speculate on the development of a share, for example. So you make a profit if you correctly assess the development of this product - or a loss if the opposite occurs.

Where are derivatives traded?

The best derivatives exchanges for traders can be found all over the world. In Germany and Switzerland, Eurex is the largest futures exchange, in the USA it is the CME (Chicago Mercantile Exchange), the CBOT (Chicago Board of Trade), and on the ICE U.S. (Intercontinental Exchange), in Korea the KRX and in Great Britain the NSYE Liffe. In Stuttgart, too, derivatives are traded on the Euwax (European Warrant Exchange). Derivatives can be traded on the stock exchange as well as OTC (over the counter, i.e. over the counter). Where the trade takes place depends on the type of derivative. Warrants and futures are exchange-traded derivatives, which means that they are advantageously standardized and can be traded with a high level of liquidity.

Types of Financial Derivative Instruments

Financial instruments are known as derivatives. There are different versions and variants of derivatives. Derivatives are popular in a market economy, especially with the trend towards globalization. It is important to know their characteristics and rules for using them, that is, when trading derivatives. The course development should always be taken into account. ROInvesting will only tell you the most important or most popular types, i.e. those that you are likely to encounter in your trading.

  1. Futures

A futures contract is a special exchange contract that requires the owner to sell or buy a commodity in the future. The contract specifies the type of goods, their quantity and a certain price. In order to sell the underlying asset at the market price, the delivery terms are set separately for each of the underlying assets, e.g. B. Time and place. Therefore, participants in the secondary markets find both buyers and sellers quickly and easily.

  1. Forward

A forward is a contract to sell and buy one of the underlying assets at a future date for a specified price. Falling prices are also taken into account. It is traded over the counter and can be drawn up on a contractual basis. It's worth noting that, for example, unlike futures, forwards doesn't dictate standards for the asset. This is the simplest of the derivative financial instruments and offers many opportunities. It is characterized by binding execution, clear definition of obligations for all parties. Forward transactions are not aligned to certain standards.

  1. Warrants

An option is a contract that only gives the buyer the right, but not the obligation, to buy or sell a specific underlying asset at a specific time and price with a specific price development. The seller gets chances of a premium that is made available to him.

  1. Swaps

A swap is a contract to exchange payments, or more precisely, a series of futures contracts in which obligations occur periodically. It is essentially a rollover of an open transaction through the night. The result of swaps is an accrued or charged commission. Such operations are popular in medium and long term transactions. Swaps are not charged during the day.

On weekdays, all open transactions are recalculated at 1 a.m. This is done by closing and reopening them. Another swap is calculated based on the current refinancing rate. The minimum interest rate is z. B. given for the combination of dollars and euros. The interest rate swap runs every day.

  1. CFDs

CFDs (Contract for Difference) allow you to buy and sell a certain number of units of a certain asset. What you win or lose depends on whether the value moves up, whether it goes up or down. CFDs are leveraged financial derivative instruments. The gains (or losses) depend on the fluctuations in the price of the asset. CFDs allow you to take both long and short positions depending on how the price moves.

Compared to traditional securities, derivatives often involve greater risks. On the other hand, due to the often high speculation, it is also possible to achieve high profits in a short time. As a beginner in particular, it is therefore important to find out exactly how derivatives work.

Derivatives are often equipped with a so-called lever. You will also come across this term often when trading. In principle, the leverage ensures that price movements in the underlying are disproportionately transferred to the derivative. Levers can be of different sizes. An exemplary scenario would be that you get a certain percentage of leverage. Even if you don't invest too much, leverage can potentially greatly increase your profits.

On the other hand, if you make a mistake, there is a risk that the leverage will cause you to lose significantly more money than you have invested. It is obvious that as a newcomer to trading, you should have someone by your side to provide information and support.

Why invest in derivatives?

The use of derivatives is undoubtedly one of the most speculative trading options on the financial market. However, with a few tips and tricks, risks can be minimized. The many different forms of derivatives offer sufficient diversity to take advantage of the prices of the underlying asset. Derivatives can be traded in either direction.

It is also possible to use leverage when trading derivative financial instruments. The leverage defines the ratio of the price to the base value (e.g. x10). So it is possible, thanks to a lever, to achieve high profits with little capital.

One particular invaluable benefit of trading derivatives is that they can be used for hedging. In the case of stocks, you can only bet on a price increase. If the investor now owns shares whose value is falling sharply and a bankruptcy situation threatens, he can use derivatives to hedge the loss. In this case, the derivatives must be speculated on a falling price. Potential gains can, to a certain extent, offset the loss in stock value thanks to this technique.

In addition to hedging, derivatives are mainly used for speculation. They can be used to make extremely high profits, but also large losses. These are made possible by the use of levers that range between 1: 1 and 1: 1000, depending on the derivative. With little capital and high risk, equally high profits can be achieved.

Derivatives can be put on both long and short positions and therefore offer a lot of flexibility in the financial market. Speculation on foreign currencies is popular here, of which Euwax in Stuttgart offers a very large number.

In addition to options, futures are also particularly frequently traded on the German stock exchange, especially on the DAX. Our trained account managers from ROInvesting specialize in your personal trading and will be happy to explain everything you need to know about derivatives, leverage and your trade in general.
  1. Open a bank account. Click on it and fill out the "Start Live Trading Now" form "
  2. Download the MetaTrader trading platform
  3. Start acting

What costs should you consider?

Even if derivatives can be purchased much cheaper than stocks and do not tie up as much capital, there are also costs here that have to be considered before investing. Unfortunately, not all reputable online brokers offer full cost transparency for their customers. Because costs for derivatives cannot be calculated as a flat rate and depend on, among other things. also depends on the personal broker. A fee must be paid for each trade, the amount of which can be calculated from the contractual conditions with the broker.

The amount to be paid for the trade can be requested from the broker in the form of fixed or flexible spreads (i.e. the difference between the buying and selling price) and as commission. Some brokers also charge fees for the partial execution of trades, for changes or for deposits and withdrawals.

Careful examination and selection of your online broker can save high costs in the long term.

What are Unsecuritized Derivatives?

Securitized derivatives can be acquired over the counter (OTC). The securitization of the security, as with warrants and certificates, means that it is more easily transferable. Futures and options cannot be securitized because they are not traded with an issuer but among investors.

Advantages and disadvantages of trading derivatives

There are many advantages to trading in derivatives. Unlike stocks, they can be traded in both directions and, thanks to the leverage effect, make big profits even with small capital. Derivatives can be acquired more cheaply than other financial instruments and tie up less capital. They can be used to hedge against risks and help prevent the financial fiasco if the share price falls. Investors can also trade derivatives outside of official trading hours. Derivatives grant companies arbitrage, which are trades that can be concluded without negative price fluctuations.

Nonetheless, the fast-paced trading of derivative financial instruments carries a risk. They require a lot of specialist knowledge and know-how in order not to speculate. OTC derivatives are not regulated and are therefore not adequately controlled. While shares are used to acquire a stake in the company and thus a dividend is paid out, this bonus does not apply to speculation with derivatives.

In addition, derivatives are subject to large fluctuations in value. Derivatives in particular, where leverage can be used, should be treated with caution. With CFDs with leverage, not only can the money be lost, but an additional sum may even have to be paid because of the contract for difference.

How to trade derivatives with ROInvesting

Trading derivatives is not a long process, especially on the ROinvesting website. By reviewing our educational resources, you can further improve your trading skills. As soon as you feel safe on our demo account, you can upgrade to a live account. Here you can find out how you can trade financial derivative CFDs on our platform:

  • Open a new trading account on our official website and accept our policies.
  • Verify your identity and address so your account is ready to trade.
  • Download MT4 on your trading gadget.
  • Deposit funds into your trading account to start trading derivatives.
  • Decide what type of derivatives trading to start with.
  • Start trading and watch out for possible risks.
  • Take advantage of the potential gain when an opportunity arises.

Frequently Asked Questions: Trading Derivatives

What are derivatives in banking?

Derivative transactions are used to bet on the development of the base value, i.e. the price increase or the price loss of a share, a commodity, etc. Derivatives include futures, CFDs, certificates, swaps, leveraged forex trading and binary options. They involve just as much risk of loss as they promise to be profit. However, derivatives can also be purchased to hedge a price risk. Derivatives can be categorized according to conditional and unconditional derivatives.

What are derivatives useful for?

In contrast to stocks, derivatives are of particular importance in the financial market because they can be traded in both directions; on both the rise and the fall. A lot of money can be made with a small investment. In addition, they can be used to compensate for a depot loss if, for B. a stock value that one owns falls. Even if the share makes a loss, the derivative can be used to bet on the fall in price and compensate for the loss.

What is a derivative simply explained?

Derivatives are financial products whose value is different from other financial products, e.g. B. a share or a raw material, depends. This share or the raw material forms the base value for the respective derivative. Derivatives are futures contracts in which both parties decide in advance to trade a certain amount at a certain time and price.

Where can I buy derivatives?

Derivatives can be purchased as financial and investment products via an online broker. All that is necessary for this is a so-called forward business ability. This is a declaration signed by the investor stating that the risks associated with financial derivative transactions are taken voluntarily. If you want to buy a derivative, you need the WKN or ISIN number.

The information provided is for educational purposes only and should not be considered investment advice without further details on specific promotions. Please note that past events and results are not a reliable indicator of future results.

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