investment guide - investment tips
investment guide, investment tips

Derivatives market

The derivatives market is very interesting and you have to be willing to do your research into this market and about the companies. It isn't as cut and dry as some of the other types of markets but your portfolio should be well rounded and derivatives are an interesting way to invest.

A derivative is buying into something in which you will likely get money or profit in the future. You must determine the market price for what you are going to invest in and it is basically hoping that the market price will still be that or higher when it is time to get your profit. It is very difficult to see this of course and you have to be good at anticipating what the market price will be and how the market is going to react by using whatever measures you can to figure this out.

Another thing you can do is 'hedge”. When you hedge you are trying to eliminate or reduce your risk. You can transfer risk from one party to another by agreeing to give cash for an amount of product in the future. This is less risky. For example, a corn farmer will get cash for the amount of corn that he produces. The corn farmer is guaranteed x amount of cash by agreeing to this and thus eliminating the risk of trying to figure out what the price of corn is going to go for when the crop is ready. The other party would be guaranteed an amount of crop that may be worth a good amount when the transaction occurs. The risk is lowered this way however the person with the cash will still lose out potentially if there are weather conditions or similar conditions that affect the crop.

There are also arbitrator in this. These people thrive on the risk rather than try to avoid it. They are basically betting that the person is wrong about the future drop in market price. They try to capitalize on the difference between the two similar markets and are basically gambling on that they will be right and you will be wrong. It's a very cut throat business and heavy losses can be made. This type of investing is not for the faint at heart. The profits can be golden and wonderful at some time and at other times it can hit your portfolio hard and cause heavy losses. It is a tough market and you must be willing to take high risks in exchange for the chance of huge profits and making lots of money. It's basically got that gambling factor. If you are willing to gamble with some of your cash, then you may win big and you may lose a lot of money. You should make sure you know how much you can afford to lose and only invest that much and do not get too involved into this investment area.


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