Definition
Derivatives trading is the buying and selling of derivative contracts, whose value is based on an underlying asset like stocks, commodities, currencies, or market indices. Investors use derivatives trading to manage risk or to profit from changes in market prices.
Example
If an investor believes that a stock’s price will increase, they can buy a futures or options contract instead of purchasing the stock directly. If the price moves as expected, the investor can make a profit from the trade.
Caution
Derivatives trading can involve high risk because prices can change quickly. It may lead to significant profits or losses, so investors should understand the market and the risks involved before trading.