Derivative

A derivative is a financial contract whose value is derived from (depends on) an underlying asset—stocks, bonds, commodities, currencies, or indexes. Common derivatives include options (rights to buy/sell at a set price), futures (agreements to buy/sell at future dates), and swaps (exchanges of cash flows). Derivatives allow hedging (protecting against price moves) or speculation (betting on price moves). They offer leverage—control large positions with small capital. However, leverage amplifies both gains and losses, making derivatives risky, especially for inexperienced investors. Most individual investors should avoid derivatives; professionals use them for sophisticated strategies.