What are derivatives? Are they a good investment?
Derivatives are financial investments whose value is derived from another security. An option is one type of derivative. The value of an option is derived from the value of the underlying stock. A derivative enables the investor to have considerable leverage. By investing in derivatives, the returns are much greater in up-markets, but the risks are also worse in a down market. But leverage works both ways. When the markets go down, you can lose everything very quickly.
Many professional investors who have been very successful in good times incurred major losses when the market turned against them, because they invested in derivatives. Remember: “There is no free lunch.” There is a definite relationship between risk and reward.
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