November 19, 2010

Derivatives

99.9% of investors have no business with derivatives.  If a financial guy suggests one to you, hang up the phone.

A derivative is a financial instrument whose value is some percentage of the future value of the underlying asset which is usually a stock, commodity or currency.

There are few instances when a derivative is appropriate for non-speculators.  A good example is a cotton farmer hedging or locking in the current price of his crop.  This lowers his risk.

Derivatives have become increasingly complex and more and more stockbrokers, financial advisors and planners are recommending them to their clients. Ouch!  All you are doing is taking on more risk.

As with most financial products, they sound great but they are not and you have no business 'investing' in them. 

No comments:

Post a Comment