Derivatives

A collective term for securities whose prices are based on the prices of an underlying investment, such as cash, commodities, bonds or equities. The main derivatives are: futures, options, swaps, warrants, convertibles. The attractions of derivatives from an investor's point of view are: large profits (but also losses) can be made on a small stake, because they offer 'leverage'; money can be made whether the market goes up or down, which is not true if you invest in shares where you only make a profit if the share price rises; they can be used to reduce the risk (or hedge) of an investment in the underlying instrument. In general, derivatives are high-risk investments and not suitable for the ordinary investor.