Financial derivatives, sometimes called ‘common derivatives’ are contractual agreements between a buyer and seller to exchange an asset or its value at the maturity of that contract (either a predetermined time or when the contract expires). Most derivatives derive their values from an underlying asset – an asset that is traded on stock, commodity or futures markets. These can be stocks, currencies, commodities, bonds, the relative values between any 2 assets (primarily currencies), and other exchange-traded instruments. These derivatives may themselves be traded at an exchange, but also Over the Counter.
The most popular type of derivative for online trading is
- the Contract for Difference (CFD), which enables the parties to speculate on the increase or decrease of an underlying asset’s value within the time frame of the contract,
- Futures Contracts, which are a standardized contract between two parties two buy/sell an underlying asset at a future date for a predetermined price,
- Forwards Contracts, which resemble futures contracts but are more informally traded though a broker.
- Options, which provide either CALL or PUT opportunities to buy/sell an asset for a predetermined price at a predetermined moment, but without obligation to do so, and
- Swaps, which enable parties to exchange cash-flows. Swaps are only performed over the counter.
Besides hedging risk and ensuring prices for producers and wholesalers, derivatives were created to foster balance in global markets otherwise ruled by volatile and diverse currencies. The derivatives market, however, has mainly become a platform for speculation.
Online brokers, like AvaTrade, characteristically offer trading on at least 250 derivatives – primarily stock, commodity, index and Forex CFDs. AvaTrade also offers contracts on ETFs and bonds, and vanilla options and spread-betting, where permitted by law – all this while offering easy and affordable entry and trading terms.