 |
| Derivatives can be used a risk management strategy. Read |
Tired of traditional shares and bond trading, then derivatives trading may be a good option for you. Derivatives pay off over a period of time based on the performance of assets, interest rates, exchange rates, or any other relevant indices. In addition to shares, derivatives can also be traded through in the money market, foreign exchange (forex).
What are Derivatives
A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by several factors including fluctuations in the underlying asset. The most common underlying assets include shares, bonds, commodities, currencies, interest rates and market indices.
Why derivatives trading
1. Less Riskier compared to other trades
When you trade in derivatives, you are not purchasing the underlying product or buying into the company, although in some cases you are agreeing to purchase assets in the future, also known as futures trading. Instead, your risk is on the performance.
While you can still lose money in derivatives trading, the risk is much less of an investment. Further, you can get involved in derivatives trading for a much lower initial investment. Derivatives can also be a good way to add balance to your total investment portfolio, thereby spreading risk throughout a variety of investments.
2. Short Term Focus
If you are looking for an investment opportunity that can pay off in a shorter span of time, derivatives may be a good option. While some shares and bonds are long-term investments over the course of many years, derivatives can be a few days or weeks. Because of the shorter time, they can be a good way to break into the market as well as a good way to mix short and long-term investments.
3. Quick Return on Investment
If you have a portfolio consisting of long-term investments, such as some shares, and want an option to put your money to work now, derivatives may be an option. Making derivatives work for you requires careful research and consideration just like any other investment opportunity. However, in a fast-paced world, investors have the option to see results much sooner in options or futures trading that are not available through other means.
4. Flexibility and Variety
The nature of derivatives essentially means that the opportunities for trading this type of investment are limited only by the imagination. The other side of this is that someone interested in entering the derivatives trading market needs to either have a trusted financial representative, or learn as much about the business as possible.
5. Global Scale
Investors are drawn to derivatives trading as they can trade on a global scale. Getting involved in the global economy can be exciting, and it opens international options that may not be available through the traditional stock market although there are stringent regulations in this area.
6. Varying Trading Options
In short, derivatives trading can be an excellent way to either break into the trading market or to round out an existing portfolio. It offers a wide range of options, including international opportunities. Finally, with some skill, research, it can be a good way to make your money work for you.
Derivative Trading in Sri Lanka
There are two main types of derivatives: futures and options, which allow someone the option to buy or sell at a prearranged price. There are three main types of firms that use derivatives. These are investment banks/commercial banks, final users such as corporations and hedge and mutual funds. However, Derivative trading in Sri Lanka is still at its infancy though CSE and SEC attempt to introduce measures to get it up and running. But, it’s important to note that certain banks provide derivative products as a risk management strategy. So, you can also taste a piece in the pie.
Compare Risk Management Options in Sri Lanka
