Investing in derivatives or not?
Derivatives are basically neutral in nature. They were created to reduce risks . There are also advantages and disadvantages to investing in derivatives. In practice, derivatives are seen more as a complex financial product and are often used to speculate on . For example, you can speculate on whether or not an event will occur, such as the bankruptcy of a company or a country.
You should not be misled by the basically neutral nature of derivatives. Because large sums of money can also be involved with derivatives. You should be aware that the value of a derivative is not determined by a real value, but by an assumed value. Derivatives are therefore traded on the basis of assumptions of values . Incorrect use can lead to large losses and you miss the goal of trading and, if possible, reducing risks with a financial instrument such as derivatives.
Higher risk with leveraged derivatives
By applying leverage , losses in derivatives can increase considerably. Because losses resulting from significant changes in the underlying value of a particular derivative can be extra large due to the leverage applied. On the other hand, leverage can also result in large profits.
Liquidity risks in derivatives
Derivatives such as a CFD can also entail liquidity risks . This is the case when a loss as a result of a certain position of the derivatives must be paid out. A debt has then arisen towards the other party that is part of the transaction. This can be caused by an unfavourable development of the underlying market values, such as the case with a sharp rise in interest rates and/or a major fall in the euro exchange rate. The value of derivatives then becomes negative.
In order to settle the debt, collateral must be provided immediately. This can be in the form of bonds or by securing, for example, a sum of money in the account. It is not always possible to release money from investments quickly, which means that at a certain point you may no longer be able to meet your payment obligations . If things go wrong, bankruptcy may be the result, even if you have sufficient assets. In order to prevent such financial problems, it is therefore always important to have sufficient liquid assets when trading in derivatives.
Compare brokers and start investing in derivatives
After reading this article about the advantages and disadvantages of investing in derivatives, are you enthusiastic about investing in this trading instrument? Compare brokers that offer derivatives and find the broker that suits you best!