What is the derivatives market and is it worth trading on it for a novice investor

What is the derivatives market and what is traded on it

The derivatives market is a segment of the exchange where contracts are concluded with a specific term. These are mainly futures and options. And in order to understand the derivatives market, you need to understand what it is.

Futures

In short, a futures contract is a deferred purchase and sale agreement. The parties conclude a contract, according to which, within a certain period of time, one of them must purchase the goods at a pre-agreed price, and the other must sell.

If the price of the goods rises by the set hour, the buyer will win, if it falls, the seller will. That is, the benefits of such contracts are tied to the ability to predict how the value will change, and on a happy coincidence.

When it comes to securities, in most cases, after the expiration of the contract, no one sells anything to anyone. The parties fix the prices for the goods on the date specified in the contract, and the "loser" pays off the "winner".

Options

Options are inherently similar to futures. These are also contracts for deferred purchase and sale, but there is one important difference.

A futures contract obliges participants to make a deal on the appointed day, this is a harsh inevitability. And the buyer of the option gets the right, not the obligation, to buy or sell (depending on the contract) the asset that underlies the option at the agreed time. It could be a stock or, say, a precious metal.

It is important that a person can buy an option and, under the terms of the transaction, subsequently act as both the seller and the buyer of the asset.

For example, a buyer takes an option on a share and pays 100 rubles for it to the seller. Under the terms of the agreement, after three months, the buyer can purchase a share from the seller for 1,000 rubles - if he wants.

If after three months the share rises in price and costs at least 1,200 rubles, it is profitable for the buyer to buy it. Its total costs will be 100 rubles less than the new value of the security: 1,000 rubles per share and 100 rubles per option. But the seller in this case will lose 100 rubles.

If the share becomes cheaper, then the buyer has the right to cancel the deal and lose 100 rubles paid for the asset. Then the seller earns 100 rubles.

Why trade on the derivatives market

Futures and options have nothing to do with conservative investing. These are speculations, which are decided in the hope that the forecasts will be confirmed, and luck will be on the side of the trader.

If the expectations are met, you can earn a lot. But the chances of losing huge sums in the derivatives market are also great.

In addition, professionals hedge a portfolio of securities, that is, they protect it from risk. This can be done, for example, by selling futures contracts on securities that are of concern. If the price rises, the trader will make money on the securities themselves, if they fall in price - on futures.

Is it worth entering the derivatives market

Experts are unanimous that this activity is not for beginners.

The derivatives market is not suitable for long-term and novice investors who are taking the first steps to save their capital. Entry into the derivatives market is low: there should be enough money only for the amount of the guarantee. And this attracts newcomers, who ultimately serve as "cannon fodder" for large fish. As a result, inexperienced traders lose their savings, and many still remain in debt to the broker. So it's better to start with the traditional markets: currency and stock.

Igor Faynman expert in personal finance and investment management

To work in the derivatives market, one must take into account a huge number of nuances, says Evgeny Marchenko, Director of E. M. FINANCE. This section is not very suitable for investors. It is rather for traders who are ready to devote a significant part of their time to reading charts, analyzing the news background and other aspects.

An inexperienced investor has absolutely nothing to do in the derivatives market. In order to use complex and derivative tools, one must not only possess the skills of risk management, but also engage in one's own analytics, without being guided by the conflicting advice of others.

Evgeny Marchenko Director of E. M. FINANCE

How to trade on the derivatives market

If you feel that you are ripe and understand how the instruments work, then you can try to enter the derivatives market and gain experience. The main thing is not to get off the bat and proceed with caution. And also to allocate the amount that you do not mind losing, and be ready for it.

If a novice investor wants to study derivative financial instruments that are traded on the derivatives market, then he must be prepared for the negative experience of losing a certain amount. Without this, it is impossible to understand how the derivatives market works.

Oleg Bogdanov Lead Analyst at QBF

In Russia, there is a derivatives market on the Moscow and St. Petersburg stock exchanges. To trade on it, you will need a brokerage or individual investment account.

For private investors, futures are more suitable for speculation than options. For a small amount, you can get rights to a significant asset. For example, for $ 100, control the movement of an ounce of gold, which is currently trading in the area of $ 2,000. But if the quotation falls, then there is a risk of losing your investment and even getting into debt.

Elena Smirnova Head of Investment Content at Banki.ru

In general, you need to be prepared to enter the derivatives market. First, learn what it is and try your hand at the traditional segment of trading in securities, rather than derivatives in the form of futures and options.

Speculation is a full-fledged job, but money for it can not only be paid, but also taken away.