Advantages and disadvantages of the derivatives

First of all, let’s try to understand what the derivatives market is. Derivatives are some kind of stocks, instruments, or an agreement that value derived by an underlying asset. The fundamentals of the derivatives market are quite different from the share market. Because here you deal with some kind of agreement or contract.

The role of the case is not most common in the derivative market. That is why this place is very suitable for traders. Traders are deal with the derivatives most often. Because there are several aspects in the derivative market that help the trader in day to day schedule.

When most of the traders are doing daily investment in the derivative market you can say this would be the best profitable place for every trader.

But you need to understand that a share market is a risky place. So derivatives have the same advantages and disadvantages that we will share further in this article.

Advantages of risk management:

Risk management: The first advantage of the derivative market is its risk management nature. Here you can manage your risk by future, forward or options derivatives.

In this segment, if two parties are predicting some market’s up and down they combine into an agreement where they can fix the prices for a certain period expiry date.

Arbitrary: this stands for taking the advantages of two different markets at the same time. Suppose an investor is thinking that a particular stock is fluctuating in the two markets then, in that case, a trader has chance to go with arbitrary and find some derivative opportunity.

Leverage: this facility is especially for the low budget size traders. Here you can buy some future lot through the option derivatives in a certain premium amount. Where you will be the owner of the complete future lot by giving a few amounts of premiums.

Suppose you want to buy 100 shares but you do not have money at the same time then you can be the owner of all 100 shares just by purchasing option derivatives. Only You have to do some premium investment.

These were some advantages to the derivatives market. Now we will focus on some disadvantages of the derivative market.

Again leverage: You might wonder why we use leverage as both sides. Because of lots of complexity in the derivative market, we can not say that a particular method is good or bad for everyone.

In the leverage option where you buy some share by giving a premium, the amount could be the lossful or useless option for you. In this case, suppose the market price is going down in such case you have to face the loss on your premium amount.

Expertise: well, this is the most common and high-risk factors for every non-expert trader. Derivatives are full of risk and complicated instruments to understand. And without having the proper knowledge in this field you might have to pay a huge amount of money in the form of loss.

So I would suggest that without having the proper expertise in the derivatives do not jump into it.

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