Investing in Financial Derivatives

Financial derivatives offer investors great advantages. When people invest in financial derivatives, they are investing a relatively small amount of money compared to how much they would be paying for a company's stock, for example. In return for the small investment of money, investors receive control of a large portion of the derivative. It is a great thing when the value of the company increases because the value multiplies.

A common example of a financial derivative is the home mortgage. Homeowners place a small amount of money as a down payment for a house and receive a mortgage that can amount to hundreds of thousands of dollars; of course, they also have control of the house. This arrangement is called giving the homeowners leverage, because the value of the homeowners' asset is much larger than the money that was initially paid to acquire it.

Financial derivatives work in the same way as the mortgage and they can be found in different industries (read up here at Troy-Invest). These industries are in markets where the prices are constantly fluctuating and they offer investors a place to make a profit. One example is the currency market. Foreign currencies such as the euro are being traded in the currency market every day, which is why the values of these currencies go up and down every time the market opens.

Another industry is the commodities or futures market. Commodities are products such as corn and precious metals. As investors invest in the corn market they are either expecting the price to go up, a long position, or go down, the short position. They can make money either way whether it goes up or down as they can in any of the other financial derivatives. The determining factor is whether or not the investors have done their homework on this industry or not. If they have not made an informed decision and they are in a long position but the value begins to fall, this is when they begin to lose money.

Investing in financial derivatives is the reason that prices fluctuate so much on the markets. A current example is the oil industry. Bad news that comes from the Middle East will tend to signal a rise in oil prices, but in the example of Lybia which is not a large oil producer, people wondered why the oil prices were subject to being raised immediately. The reason is because investors were speculating right away that oil prices would soon begin rising and people began to go into long positions forcing the price of oil to go higher.

In order to invest in financial derivatives, investors join a brokerage firm. The investors first will study the trends that are going on in the market in which they want to invest. After they have decided that they think a particular derivative is going to rise, they can call their brokers and tell them they would like to take the long position. Then investors watch and wait to see if they are right. In the event that they are right, the money in their accounts will increase in value. As with everything, what goes up also has to come down. The next thing that investors have to decide is when they are going to sell and take their profits. It is even possible to begin this type of account by just paper trading; it is a way of learning how to perform successful trades without risking any real money.

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