Reading the Financial Pages for Dummies®

Chapter 12. Delving into Derivatives

In This Chapter

• Considering futures

• Deciding on warrants

• Recognising your options, your choices, and your responsibilities

I'm going to start this Chapter by saying that derivatives are probably the deepest water you're ever likely to get into as an amateur investor. No, actually, I'm going to go even further than that. Don't get into derivatives at all until you're good and ready, because they can really be far too dangerous for a beginner. A wrongly placed futures contract can leave you worse off than when you started. You can indeed lose much more than your original stake with some kinds of derivatives, and no-one wants to see that happening.

But the dangerous nature of derivatives doesn't mean that you don't need to understand at least a little bit about them. The more you get interested in the commodities market (oil, gold, copper, wheat, and all that), the more often you're going to come across mentions of derivatives in the newspapers, because derivatives really are what drive the raw materials industry. And the more sophisticated hedge funds (Chapter 15 deals with these) get in the next few years, the more likely you are to find yourself reading articles that demand at least a limited amount of knowledge about this peculiar business. So I wouldn't be doing my job if I didn't at least give you a feel for what they are.

Derivative is rather a broad piece of terminology that covers an awful lot of ground, so I need to simplify things a bit. A ...