DEFINITION of 'Underlying'

1. In derivatives, the security that must be delivered when a derivative contract, such as a put or call option, is exercised.

2. In equities, the common stock that must be delivered when a warrant is exercised, or when a convertible bond or convertible preferred share is converted to common stock.

BREAKING DOWN 'Underlying'

The price of the underlying is the main factor that determines prices of derivative securities, warrants and convertibles. Thus, a change in an underlying results in a simultaneous change in the price of the derivative asset that is linked to it. In most cases, the underlying is a security such as a stock (in the case of options) or a commodity (in the case of futures).

  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Full Value

    The total worth of a financial instrument or organization. Full ...
  3. Convertible Preferred Stock

    Preferred stock that includes an option for the holder to convert ...
  4. Convertible Bond

    A bond that can be converted into a predetermined amount of the ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  6. Conversion Price

    The price per share at which a convertible security, such as ...
Related Articles
  1. Fundamental Analysis

    Profit By Understanding Fundamental Trends

    Fundamental trends are an important driver of financial markets and every investor and entrepreneur should analyze them.
  2. Bonds & Fixed Income

    Convertible Bonds: An Introduction

    Find out about the nuts and bolts, pros and cons of investing in bonds.
  3. Options & Futures

    Warrants: A High-Return Investment Tool

    Discover the advantages of this largely unexploited investment vehicle.
  4. Options & Futures

    Minimize Risk With The Long Collar

    Think your favorite stock is on the way down? This simple option-trading strategy can help you manage your risks without selling the stock.
  5. Insurance

    Futures Fundamentals

    For those who are new to futures but want a solid understanding of them, this tutorial explains what futures contracts are, how they work and why investors use them.
  6. Investing Basics

    5 Common Misconceptions About Dividends

    Here are five common misconceptions about dividends that are important to know.
  7. Term

    What's a Sector?

    The term sector has several applications in economics and finance.
  8. Term

    What's a Return of Capital?

    A return of capital is an investment return that is not considered income.
  9. Term

    What's Recapitalization?

    Recapitalization is the restructuring of a company’s debt and equity mixture.
  10. Investing Basics

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  1. What are some popular ETFs that track the industrial sector?

    As of April 2015, some of the most popular and best performing exchange-traded funds (ETFs) that track the industrial sector ... Read Full Answer >>
  2. What does the underlying of a derivative refer to?

    A derivative security is a financial instrument in which the price of the derivative is dependent on its underlying asset. ... Read Full Answer >>
  3. Can an option have a negative strike price?

    The simple answer is that, at least when it comes to exchange traded options, an option can't have a negative strike price ... Read Full Answer >>
  4. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  5. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  6. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!