There is a wide, varied range of markets that financial traders can choose from. Markets of currency pairs, currency derivatives, stocks, financial derivatives, and cryptocurrencies are all gaining dedicated traders. Even financial derivatives, which are relatively new compared to other financial instruments, aside from cryptocurrencies, are gaining popularity.
There are, however, people who still hesitate to capitalize on the opportunities presented by the market because they’re afraid of risk. Some even label trading in any form as no different from gambling.
The thing is, they’re right. Any form of financial trading includes a significant amount of risk of losing your money. Money can be made–but also lost, regardless of the financial instrument you’re trading.
As more and more people realize this fact, they’re turning to methods that offer them lower risks while still allowing them to participate in the financial market. Trading financial derivatives are now attracting millions of dedicated traders from all over the globe. And in today’s article, we’ll discuss the 6 reasons why financial derivatives are popular.
What are these financial derivatives?
Financial derivatives are instruments that rely on other financial instruments for their value. The financial derivatives traded on the stock market are a specific kind of derivative–they’re essentially a form of contract that gives one party the right to buy an underlying asset for a set price, at a specified future time, regardless of whether the underlying asset’s price changed or not.
These types of financial derivatives can be acquired over-the-counter (OTD) or can be traded on an exchange similar to other assets. They are typically used to hedge risk because they are less risky than stocks, bonds, currencies, or other similar financial products.
Why financial derivatives are popular
So, why exactly are these assets such a popular choice for even the most experienced of traders? I can pin this down to 6 main reasons.
Financial derivatives may make you money even in ranging markets
In most financial markets, you can only make money when there is a significant change in price. In stocks, for example, you can only gain if the price rises or falls relative to your strike price. More than that, if you want higher returns, you have to wait for bigger and bigger price changes, thereby incurring more and more risk.
This is not the case with financial derivatives. The only thing you need to do is predict whether the price will be higher or lower than your strike price after a certain amount of time. Because of their fixed return, even a price change as small as 0.001 towards the direction you forecasted can offer as much as 90% in profits–although at the same time, one small tick to the opposite can result in a loss.
This becomes very handy when the asset’s price is experiencing only minor price movements for a long period of time, a term that is called ‘ranging’. This makes derivatives versatile and profitable even in scenarios where stocks and other financial assets may stall in value.
It’s cheap to trade this type of asset
Financial derivatives brokers are gaining a lot of traction with new customers because of the low barriers to getting started. You can even open a trading account for this type of financial derivative for as little as $5, and already open a position for as low as $1. With returns that can reach as high as 90%, a $1 trade has the possibility to make you $0.90 in just a little while. Scale that up, and you’ve got a sure moneymaker if you play your cards right. Always be wary of the risks involved, though.
On the other hand, more common assets like stocks, currency derivatives, and cryptocurrencies require a huge upfront investment. Stock and currency trading accounts range from $20 to $500. The value of Bitcoin is about $5000 for a single coin, and Bitcoin derivatives don’t fare any better, given how volatile its market is. Compared to derivatives, these assets are much more expensive.
You know the potential profit from the beginning
In other financial assets, the profit you might earn depends entirely on the asset’s price fluctuation. If the price moves further into the direction you predicted, then you will get high profits. But at the same time, if it moves far into the direction you did not anticipate, your loss will be just as high. You don’t know how much you will gain or lose, and therefore planning for eventualities becomes difficult.
In short, because of this reliance on volatility, compared to derivatives other financial assets can be considered as high risk.
On the other hand, when trading with these assets, you already know the potential profit from the very beginning. This is because the potential profit is simply a calculated percentage of the amount you invested in trade. Most platforms offer returns ranging from 60% to 95%.
Knowing how much you gain or lose in a transaction is a huge plus, as it allows you to plan much more accurately, and farther ahead. You can ensure that even if your trade ends up losing, you can easily recover by placing several winning forecasts. And because you know exactly how much you will be getting, you can choose which exact trades would best benefit you.
The only amount you can lose is the trade amount
Just like knowing how much you can possibly earn with a single contract, financial derivatives also allow you to know much you stand to lose if the direction of the market doesn’t go your way. And what’s the amount, you may ask? Well, the maximum amount you can lose in a single trade of derivatives is the amount you put into the trade in the first place.
Additionally, some brokers–like Binomo–even allow you to exit trades before they expire, reducing your risk of losing the entire amount.
To illustrate, let’s say that you invested $10 in a trade with 80% return, and then let’s say that the market went your way–but for some reason you decided to exit before the trade expiry. In that case, Binomo–depending on your account type and specific trade–could give you $3 to $5 as profit, and keep the rest. If the trade was losing and you decide to exit, Binomo might deduct only $3 to $8 from your initial investment, so you don’t lose your whole $10 investment.
This is in direct contrast when trading with other financial markets such as currencies or stocks, as with them you stand to lose more than just your initial investment. If the value moves further away from your anticipated price, you might lose even more than 100% of your investment. When this happens, the brokerage will usually take money from your account balance to keep the trade open. Because of this, it’s advised to use stop-loss tools when trading in these kinds of markets.
Financial derivatives trading is easier to learn
Financial derivatives utilize the same charts, tools, and techniques used by traders in other markets. Just the same as trading other assets, you still need to learn how to make sense of charts, read indicators, have a trading strategy, and a good grasp of trading psychology.
However, because there is less risk involved in trading derivatives, new traders have both the financial and psychological allowance to learn things at their own pace. This is unlike other financial instruments, where you may have to pay a steep price for learning.
This is probably why experienced currency or stocks traders often say that they find trading this asset significantly easier, and another reason why it’s so popular.
1 minute can already turn a profit
In other financial markets, you have to wait until your asset’s price reaches your ideal price for profit. This may just take seconds or minutes, in the case of day trading, but this can also take days or weeks. In contrast, derivatives are intended so you might make a profit immediately, even in as little time as 1 minute (Note: despite this, we don’t recommend trading short expiry times, as we’ve mentioned in many other guides on this site).
This is because derivatives expire after a set period, so their life span is already naturally limited. In addition, all you need to gain profit is to predict whether or not the price will be higher or lower than your strike price at the time of expiry.
And there you have it for the 6 reasons why financial derivatives are popular. To summarize, these assets are popular because:
- You don’t have to wait for the perfect price fluctuations because you have the possibility to profit even in a ranging market;
- You don’t need a lot of money to start trading;
- It’s easy to see your potential right from the start;
- The maximum amount you can lose is the amount that you choose to trade or even less than that;
- It’s not difficult to start learning about financial derivatives, and;
- 1 minute is sometimes all it takes to increase your demo account’s balance.
How about you, why do you think we should trade financial derivatives with Binomo? Share them in the comments below!
Good luck in your trading journey with Binomo!