Most individuals who are just beginning to invest their money work with stocks and bonds, but a few brave souls who want to control the amount of risk they take on might consider the use of derivatives.
Investors who are considering working with these financial instruments need to carefully consider the risks they will be incurring by using the risk management tools, according to RTT News. Derivatives are financial instruments that are derived from an underlying asset such as a stock or bond. These instruments can be used by individuals to either lower or increase risk.
The ability to utilize leverage when investing in these financial instruments provides more opportunity for returns, but comes at the cost of increased risk. Potential investors need to be sure to do the due diligence needed on the derivatives they want to use.
"I think that derivatives are mostly purchased because they bring a sense of leveraging," George Stevens, director at Beacon Hill, told RTT News in an interview.
Investors who want to reduce their risk can assemble diversified portfolios of index funds, mutual funds, or exchange-traded funds. Doing so could provide far better diversification than investing in individual stocks and bonds.