Derivatives trading: high returns, low cost, high risk

In the stock market, the investor makes a profit when his share prices rise, and loses when his shares drop, but the matter is different in the derivatives trading market, where profits may be achieved with the contract prices falling, and losses may occur with the increase in their market value. Let’s explore how that would be.

Financial derivatives are the most important innovations in the investment world, and they represent a qualitative development in the financial markets, as they emerged and developed in the last quarter of the twentieth century. Financial derivatives are contracts made between two parties and their value is derived from the prices of the financial assets under contract, or their market value is taken from the market value of the asset, such as stocks, indices, currencies, energy contracts, animal products, food, industrial and others.

Derivatives contracts

Derivatives contracts are divided into two types:

Contracts traded in regulated markets: options contracts and futures contracts.

(Options contracts and future contracts).

Contracts traded in unregulated markets: futures and swap contracts.

Futures and exchange contracts))

Benefits of trading in financial derivatives

Dealing with derivative financial instruments provides a range of benefits to investors, the most prominent of which are:
Derivatives help manage credit, legal, operational and market risk in new ways.
Contributes to hedging any price fluctuations that may affect the trader’s investments in the financial markets.
Lead to a decrease in trading risks as a result of its distribution to all parties.
It provides the opportunity for investors to buy a larger amount of shares at a lower cost.
Contribute to raising returns as a result of reducing the cost of investment.
Contribute to building more diversified investment portfolios.