An introduction to derivatives for beginners

Derivatives are financial instruments that derive their value from other existing asset classes. The term "Derivative" indicates the instrument derives its values entirely from the asset it represents be it equity, bullion, currency, commodity, realty, rate of interest or even livestock.

Simply put, when you invest in derivatives, you actually place a bet on whether the value of the asset represented will increase or decrease by a certain percentage and within a set period of time.

There are three types of participants in a derivatives market: Speculators, Hedgers and Arbitrageurs. Speculators are the high risk takers. They take risk to earn profit by buying low and selling high, or by first selling high and later buying low.

Hedgers are cautious players who protect themselves from risk by closely watching price movements and sell as soon as they reaches their optimum price, thus getting an assured price for the stocks.