What are Derivatives ?

The reason is that derivatives are very tricky to explain, but at the end of this video I have 3 goals to accomplished.

– Explain what derivatives are
– The Different types
– And if you should consider investing in them

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1. The First Type Of Dirivities are Futures ( you have publically traded futures and private traded ones also )
– Futures are people entering into contracts on the value of security for a predetermined price and also date ( this is an obligation, not an option )
– So keep in mind this is in a big way a lot of speculation going on here

Results:
– The Farmer agreed to sell him the Pigs for $100( price ) next year ( time)
– Next year comes by: Pig prices have skyrocketed to $500 per pig ( now the investor made a lot of money and the farmer was obligated to sell it at $100)
– But in a different timeline, Pig Flue went crazy and the investor was forced to buy them for $100 when they were only selling for $10

Tip: obviously this is speculation
– and the investor could have sold it before it got to low to someone else with hopes

How this works in the stock Market: Commodities, currencies, and crypto ( profit )
– Now I strongly believe that in 1-year bitcoin will be at $100k
– So I buy a futures contract today for a premium and pay $51k ( or whatever the price is when you are watching this video )
– In one year the price is $100k and I just 49k in profit ( but if it goes down to 0 then I lost all my money )

And you can also Short Futures:
– When you think the price is going to go down
– You can buy today and sell instantly and rebuy at the agreed time hopefully for a discount

Tip: the problem with this in the stock market
– You have unlimited profit potential and an unlimited risk potential also (it’s crazy)
– Crazy leverage
– Crazy gambling
– Crazy speculation
– But everyone thinks they are expert

2. Another type of Derivatives Are Options
– Now these are not the obligation to buy or sell but options to ( futures and forward contracts are though )
– These are contracts that just give you the right to sell or Buy
– But they do have an expiration date

Quick Definitions:
– Call options allow you to buy the assets
– Put options allow you to sell the assets

Here is a simple example:
– I work for Apple and they paid me with Call options
– Meaning I have the right to buy the asset at a certain price
– The option says I have the right to buy it at $100 per share and now the stock is at $200, well I just doubled my money

Or for example Put options:
– I have the right to sell the stock at certain prices
– The options says I can sell it at $100
– And the price went down to $50 ( none of my business I’m going to cash out )

Tip:
– However in real life, options are usually issues out for 30 days and then they expire
– And they also have premiums you have to pay to own the contracts
– So it’s a lot of speculation going on in this game.

3. Swaps (OTC)
– Exchanging one security for another but it can also be payments, cash flow, loans, and a lot more other things.

Simple Example: ( Loan )
– My business partner took out a variable rate loan and is getting worried because the amount he pays every month is changing (( but if profits are going down because of the pandemic)
– SO we enter into a contract where we will swap. I will pay the variable loan and he will pay me a fixed amount of money
– Why because if rates go down I make money and rates go up he saves money

Finance Example: Credit Default Swap
– Bond issuers, bond buyers, and Credit Sqap Default insurance
– Giving away some of your interest to guarantee your capital in case things go wrong

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*Some of the links and other products that appear on this video are from companies in which Tommy Bryson will earn an affiliate commission or referral bonus. Tommy Bryson is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available. I’m an Accountant but I’m not your Accountant, always review information with your Accountant/CPA and your Financial Advisor.

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