Derivative

A derivative is a financial instrument that derives its value from something else—an underlying asset such as a stock, bond, commodity, currency, or index. Common derivatives include options, futures, forwards, and swaps.

Derivatives serve two primary purposes. Hedgers use them to protect existing positions against adverse price movements—for example, an airline might use oil futures to lock in fuel costs. Speculators use them to bet on price movements, often with significant leverage, amplifying both potential gains and potential losses.

Because of their complexity and leverage, derivatives are generally suited for experienced investors. For most retail investors, understanding what derivatives are is more important than trading them directly.