Derivatives

Types of Derivatives
They are financial contracts that derive their value from an underlying asset or index, such as an interest rate or foreign currency exchange rate. They can be used to manage risk, reduce cost and enhance returns. Some common derivatives are futures, options, swaps and warrants. Derivatives have evolved to include newly traded products like contracts for difference, spread betting, commodities dealing and foreign exchange speculation.

Ownership & Stamp Duty
They all have one thing in common - the investor never actually takes ownership of the asset that the derivative is based on. As a result, this implies a small, but worthwhile, tax advantage. Unlike traditional share dealing, the fact that there is no change of ownership with a derivative, no stamp duty is charged.

Leverage or Gearing
Without actual ownership, it’s not generally necessary to pay the full price of the underlying asset in a derivatives trade. Instead the investor can provide only a relatively small percentage of the notional value of the trade, but receives the full gain or incurs the full loss, should there be one. This leverage, or gearing, means that large profits (but also large losses) can be made on a small stake.

Long or Short
Because derivatives are essentially a bet on which way the price of the underlying instrument will move, you can make money whether the market goes up or down – not often true if you invest in direct equities.

Protection
Derivatives are more often used to protect investors exposure to adverse market movements. If you have an equity holding which you can’t or don’t want to unwind and you feel exposed to an unfavourable price movement, you can hedge that position, taking out a derivative which counter-balances any loss you might suffer on the underlying equity price.

Contracts For Difference (CFD’s)
A CFD is an instrument which allows an investor to profit from the price movement of an underlying security/equity. CFD trading leverages your funds in so far that it multiplies both gains and losses.
Read more on CFD’s [goes to CFD’s Page]

Commodities
An alternative to share trading, commodities (like metals and foodstuffs) present profit making opportunities, through both prices rises or falls. They can be traded directly, or through derivative instruments, such as options and futures.
Read more on Commodities [goes to Commodities Page]

FOREX
The unregulated Foreign Exchange (FX) market is extremely liquid with daily trading often exceeding 1.5 trillion US dollars. Speculating on the movement of major currencies (Sterling, Dollar, Euro, Yen) is often a short-term market for day traders. Alternatively, simply wishing to convert currency is also available at YTM Stockbrokers.
Read more on FOREX [goes to FOREX Page]

Futures & Options
These are derivatives instruments which offer the investor an opportunity to ‘buy or sell a security, or a commodity, at a specified date and a pre-determined price. Most often used by hedge funds these are also suitable for the private ‘expert’ investor.
Read more on Futures & Options [goes to Futures & Options Page]

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