Definition
A derivative is a financial contract whose value depends on the price of another asset, such as stocks, commodities, currencies, or market indices. Investors use derivatives to manage risk or to earn profits from price movements.
Example
A futures contract on gold is a derivative because its value changes based on the price of gold. If the price of gold goes up, the value of the contract may also increase.
Caution
Derivatives can offer high returns, but they also involve high risk. Since their value depends on another asset, prices can change quickly, leading to significant gains or losses. Investors should understand how they work before trading.