Derivatives as an Investment

In this section, we will discuss the riskier investment vehicles that a person can use to invest in the stock market. By "riskier" we don't mean buying shares in a young, unstable company or buying stock at a low price in a company going through a turbulent period that you predict is temporary. What we discuss here is situations where you don't invest by actually buying shares of a corporation.

How do you invest in the stock market and not buy any stock? This is usually done through derivatives, which include options contracts or futures contracts that enable you or obligate you to buy or sell stock at a certain price. Options and futures contracts are called derivatives because the price you pay is derived from a variety of sources, including the actual price of a stock.

In this section we will also discuss buying stocks on margin as well as a technique known as selling short.

Warning If you decide that you want to invest in the stock market, you should know that there is always some risk associated with this type of investment. The age and stage of your life as well as your own personal risk tolerance should determine the amount of risk you can afford to take and act accordingly. Derivatives are acknowledged as the riskiest of investments you can make in the stock market. Evidence of this is that financial reform passed in 2010 requires stricter oversight of the derivatives market due to its role in the recent economic crisis. Obviously, no matter what age or state you're at, you should do all you can to make educated choices and avoid risky stocks if you're not prepared to suffer the losses that might result rather than the great gains you're hoping for.

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