What is an 'Underlying Security'

An underlying security is the security on which a derivative derives its value. For example, a call option on Google stock gives the holder the right, but not the obligation, to purchase Google stock at the price specified in the option contract. In this case, Google stock is the underlying security.

BREAKING DOWN 'Underlying Security'

In derivative terminology, the underlying security is often referred to simply as "the underlying." An underlying security can be any asset, index, financial instrument or even another derivative. Generally, an underlying security's value should be independently observable by both parties, so that there is no potential for confusion regarding the value of the derivative. Investors dealing in derivatives must closely research the underlying security in order to ensure that they fully understand the factors affecting the value of the derivative.

RELATED TERMS
  1. Underlying Option Security

    An underlying option security is the financial instrument on ...
  2. Underlying Asset

    A term used in derivatives trading, such as with options. A derivative ...
  3. Equity Derivative

    A derivative instrument with underlying assets based on equity ...
  4. Derivative

    A security with a price that is dependent upon or derived from ...
  5. Underlying

    1. In derivatives, the security that must be delivered when a ...
  6. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
Related Articles
  1. Financial Advisor

    Warrants

    Learn more about this derivative security.
  2. Trading

    Derivatives 101

    Learn how to use this type of investment as an alternative way to participate in the market.
  3. Trading

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  4. Trading

    Derivatives 101

    A derivative investment is one in which the investor does not own the underlying asset, but instead bets on the asset’s price movement with another party.
  5. Managing Wealth

    Explaining Underlying Assets

    An underlying asset is the financial instrument from which a derivative's price is based.
  6. Investing

    The Biggest Risks of Investing in Google Stock

    Read about the biggest risks facing search-engine conglomerate Google Inc. shareholders, especially the risks of increased government regulations.
  7. Trading

    Examples Of Exchange-Traded Derivatives

    We look at some of the most common exchange-traded derivatives.
  8. Financial Advisor

    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.
  9. Small Business

    13 Facts You Didn't Know About Google

    Find out more about Google Incorporated, 13 facts some people may not know about Google, including the history of and technologies of Google.
  10. Trading

    Are Derivatives A Disaster Waiting To Happen?

    They've contributed to some major market scandals, but these instruments aren't all bad.
RELATED FAQS
  1. What does it mean to be long or short a derivative?

    Find out more about derivative securities and what it indicates when traders or investors establish a long or short position ... Read Answer >>
  2. What does the underlying of a derivative refer to?

    Find out more about derivative securities, what an underlying asset is and what the underlying assets refer to in stock options ... Read Answer >>
  3. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Answer >>
  4. What expiry months are typically available for derivatives?

    Discover more about the derivatives market and learn about the varying expiration months for derivatives in different financial ... Read Answer >>
  5. How big is the derivatives market?

    Examine the potential size of the total derivatives market, and learn how different calculations can reduce the estimate ... Read Answer >>
  6. Can mutual funds invest in derivatives?

    Find out about mutual fund investment options, and understand whether mutual funds are permitted to include investments in ... Read Answer >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center