While many people think of futures and options — known as derivative investments — as uniquely risky, they’re in fact among the most versatile of investment choices. Derivatives can be used by conservative or speculative investors, to enhance or protect their portfolios, in rising, falling, or neutral markets.
Many investors use derivatives for the leverage they offer. But because derivative prices can be volatile, you can lose or make a lot of money very quickly this way. Conservative investors may use derivatives to protect the value of their portfolios from falling prices, to lock in a favorable purchase price, or for immediate income.
Because timing can be critical, derivatives — and especially futures — may be less well suited for buy-and-hold investors. But for investors who are willing to make day-to-day trading decisions, derivatives can add additional diversity to an already well-balanced portfolio.
