Derivatives  Criticisms of Derivatives
Options offer the potential for huge gains and huge losses. While the potential for gain is alluring, their complexity makes them appropriate for only sophisticated investors with a high tolerance for risk.
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 When a derivative fails to help investors achieve their objectives, the derivative itself is blamed for the ensuing losses when, in fact, it's often the investor who did not fully understand how it should be used, its inherent risk, etc.
 Some view derivatives as a form of legalized gambling enabling users to make bets on the market. However, derivatives offer benefits that extend beyond those of gambling by making markets more efficient, helping to manage risk and helping investors to discover asset prices.
While professional traders and money managers can use derivatives effectively, the odds that a casual investor will be able to generate profits by trading in derivatives are mitigated by the fundamental characteristics of the instrument:
Lifespan  Derivatives are "timewasting" assets. As each day passes and the expiration date approaches, you lose more and more "time" premium and the option's value decreases.
Direction and Market Timing  In order to make money with many derivatives, investors must accurately predict the direction in which the market or index will move (up or down) and the minimum magnitude of the move during a set period of time. A mistake here almost guarantees a substantial investment loss.
Costs  The bid/ask spreads of more common derivatives such as options can be daunting. An option with a bid of 5.25 and an ask of 5.875 means an investor could buy a round lot (100 units) for $587.50 but could only sell them for $525, resulting in an immediate loss of $61.50 before factoring in commissions.
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Arbitrage
Professionals
What is a Derivative?
CFA Level 1  What is a Derivative?. Learn the basicas of derivative instruments. Covers various types of options, swaps and differentiates exchange and overthecounter trades. 
Investing
What Is A Derivative?
A derivative is a security whose price is dependent upon or derived from one or more underlying assets. Learn more on how investors can use this financial instrument in their trading strategies. 
Options & Futures
Derivatives 101
A derivative investment is one in which the investor does not own the underlying asset, but instead bets on the assetâ€™s price movement with another party. 
Professionals
Purposes and Benefits of Derivatives
CFA Level 1  Purposes and Benefits of Derivatives. Learn the purposes and benefits of derivatives. Discusses how derivatives can yield profits and be used as a tool for risk management. 
Professionals
Derivatives
CFA Level 1: Section 15  Derivatives 
Investing Basics
Warrants
Learn more about this derivative security. 
Products and Investments
SEC Derivatives Rule May Limit Diversification
The SEC has proposed rules that will limit the use of derivatives by fund managers. Critics believe the rules will impede funds' ability to diversify. 
Fundamental Analysis
Derivatives 101
Learn how to use this type of investment as an alternative way to participate in the market. 
Options & Futures
Was Buffet Right about Derivatives as WMDs?
Why Warren Buffet described derivatives as weapons of mass destruction, and when can they be helpful or harmful? 
Options & Futures
Futures, Derivatives and Liquidity: More or Less Risky?
Futures and derivatives get a bad rap after the 2008 financial crisis, but these instruments are meant to mitigate market risk.

Exchange Traded Derivative
A financial instrument whose value is based on the value of another ... 
Underlying Option Security
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Underlying Asset
A term used in derivatives trading, such as with options. A derivative ... 
Derivative Product Company  DPC
A specialpurpose entity created to be a counterparty to financial ... 
Derivative
A security with a price that is dependent upon or derived from ... 
Equity Derivative
A derivative instrument with underlying assets based on equity ...

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