Word of the Day
Financial contracts, such as futures and options, whose value is derived from the value of some underlying asset, rate or index. This is where investment gets really scary because you're not actually buying anything tangible, just the right to buy or sell something at a set price in the future. Derivatives are primarily used by governments and companies as a way of reducing the risks associated with interest rate and foreign exchange rate volatility. But they can be extremely rewarding - if very risky - for sophisticated private investors, too. You can often buy them 'at margin', which means you pay only a fraction of the total value of the underlying asset. But your profits - and losses - are based on this total underlying value. So for a small investment you can make a big profit. This kind of magnifying effect is known as gearing.