What is a derivative? whose value is based on the value of one or more underlying assets such as stocks, commodities, currencies, or indices. Major derivative products include futures, options, and swaps, which provide diversified investment opportunities and a means to manage risk.
1. What are Derivative Securities?
Derivative securities, a concept that is no longer strange in the financial market, is a type of contract between parties whose value depends on the underlying asset. This asset can be a stock, a stock index, or other types of assets such as agricultural products, metals, etc., with the condition that the payment and transfer of the underlying asset takes place at a specified time in the future, at the agreed price.
Within the framework of economic transactions, derivative (English: derivative) is understood as a type of contract whose value is determined based on another underlying asset such as stocks, indexes, interest rates, or other types of assets, without owning a separate real value. This tool has many applications from hedging, speculation, to expanding access to assets or illiquid markets. Derivatives are one of the three main types of financial instruments, along with equity (stocks) and debt (bonds and mortgages).
Globally, common derivatives include mortgages, credit default swaps, forwards, swaps, options, and structured products. One of the earliest recorded examples of derivatives is the olive contract of Thales, an ancient Greek philosopher who profited from the transaction as described by Aristotle. Notably, derivatives trading does not involve physical delivery, but rather revolves around the purchase and sale of securities.
Despite the potential risks, derivatives are still considered an attractive investment channel with effective risk prevention measures. Investors can limit risks by mastering knowledge and taking advantage of in-depth analysis from reputable securities companies.
2. Derivative Products in Vietnam
In Vietnam, derivatives market opens up opportunities for investors to “bet” on the future up or down trend of the underlying asset. The success of investors depends on accurately predicting market trends, thereby profiting from price fluctuations.
Product types of What is derivative?? Derivative securities have developed strongly through four main types:
- Futures Contract: This is an agreement between two parties to buy or sell an asset at a specified time in the future, at a price that is predetermined at the time the contract is signed.
- Futures Contract: A standardized version of a futures contract that can be listed and traded on a stock exchange.
- Option Contract: Gives the buyer of the contract the right (but not the obligation) to buy or sell the underlying asset at a specified time at a specified price. The seller of the contract must execute the transaction if the buyer decides to exercise his right. An option contract includes both the right to buy and the right to sell.
- Swap Contract: An agreement between two parties to exchange cash flows from financial instruments in the future, with clear terms on when and how the exchange will take place.
Among these, futures contracts are the first products listed and traded on the Vietnam Stock Market, including futures contracts on stock indices (VN30 and HNX30) and futures contracts on government bonds (5-year term). This choice is based on the simplicity of the product, along with the low risk and high representativeness of the underlying assets. The trading principles of futures contracts are not too different from those of ordinary stock trading on the underlying market.
3. Note for new investors participating in derivatives
Derivative securities (HDTL) bring a clear difference from the normal stock trading through the mechanism of "expiry" and "margin", providing the ability to trade without having enough money or assets. This mechanism facilitates investors to access financial leverage, increasing the opportunity to profit from the market. To minimize risks when participating in the derivatives market, investors need to note some important points:
- Understand derivatives regulations: Learn how derivatives work and how they differ from traditional securities, such as margin requirements to execute trades.
- Margin and risk management: Margin is a security deposit for trading. Depending on the policy of each securities company, the initial margin ratio may vary, and if the account is in loss, the investor may need to deposit more margin.
- Choose a trading platform: Choosing the right trading platform can help optimize an investor's profits.
- Short selling: This is a special feature of derivatives, allowing investors to sell stocks without owning them first, opening up opportunities to profit from falling stock prices.
- Emotional Management: Volatile markets can lead to hasty trading decisions. Equipping yourself with knowledge and skills to analyze the market helps investors maintain perspective and avoid being affected by FOMO (fear of missing out).
- Comply with the 2%-6% rule: This is a capital management principle, limiting the loss for each transaction to no more than 2% and the total loss to no more than 6% of total capital, helping to control risk and preserve capital.
By applying the above principles, new investors can access the derivatives market safely and effectively, gradually enhancing their investment and risk management capabilities.
4. Advantages and disadvantages of Derivatives
What are the advantages of Derivative Securities?
- Diversify your investments: Derivatives expand investment opportunities by offering a wide range of products, from futures, options, to swaps, to suit investors of all risk tolerance levels.
- High liquidity: Derivative products are often convertible into cash quickly and easily, giving investors the flexibility to adjust or exit positions.
- High profit potential: Derivative securities provide great opportunities to profit from market fluctuations, if investors have accurate and flexible investment decisions.
- Risk insurance: Investors can use derivatives as a tool to protect their portfolio from market risks, helping to minimize losses in adverse situations.
Disadvantages of Derivative Securities:
- High Risk: Derivative products carry a high level of risk, especially for investors who do not have sufficient experience or knowledge of the market.
- Influence from external factors: The value of derivatives can be greatly affected by external factors such as interest rate fluctuations, economic policies, or political events, increasing the risk of uncertainty.
- High transaction costs: Transaction costs for derivatives are typically higher than for traditional securities, including brokerage fees, management fees, and other fees that can affect the total return from the investment.
In the investment context, derivatives require investors to carefully consider the potential for profit and the risks they may encounter. To be successful, investors need to have a deep understanding of the product, as well as an effective risk management strategy.
5. Start investing in Derivative Securities
Beginners should do their research thoroughly. What is derivatives trading? Before participating, consider opening an account at a reputable exchange to ensure safety and efficiency in investment. Derivative securities are not only an opportunity but also a challenge, requiring investors to always update their knowledge and appropriate investment strategies.
Derivative securities, with its outstanding features and utilities, are not only a new step forward in the financial sector but also open up promising investment opportunities for investors. To start trading derivative securities, investors need to perform the following steps:
Step 1 – Open a Derivatives Trading Account: Investors need to open a special derivatives trading account, this process can be completed in just 3 minutes online at securities companies. For investors who already have a basic securities account and want to add derivatives trading, just contact the broker or call the hotline of the securities companies for registration support.
Step 2 – Deposit Deposit: Before participating in the derivatives market, investors need to deposit a margin as prescribed. This amount helps ensure payment and performance of contractual obligations, and supports payment risk management.
Step 3 – Trading on the Stock Exchange: Investors will participate in trading futures contracts with their own codes on the stock exchange, placing buy or sell orders based on predictions about the trend of future indices. Investors need to pay attention to the expiration date of the contract to choose the appropriate contract.
Step 4 – Clearing Payment: At the end of each trading day, investors need to pay the profit or loss arising according to the futures contract price of that day. If the margin balance falls below the prescribed level, investors will need to add margin. In case of excess margin, investors can withdraw it.
The above process helps investors easily participate in the derivatives market, with effective risk management and profit potential.
