Investing has become much more complicated over the past decades as various types of derivative instruments become created. But if you think about it, the use of derivatives has been around for a very long time, particularly in the farming industry. One party agrees to sell a good and another party agrees to buy it at a specific price on a specific date. Before this agreement occurred in an organized market, the bartering of goods and services was accomplished via a handshake.
The type of investment that allows individuals to buy or sell the option on a security is called a derivative. Derivatives are types of investments where the investor does not own the underlying asset, but he or she makes a bet on the direction of the price movement of the underlying asset via an agreement with another party. There are many different types of derivative instruments, including options, swaps, futures and forward contracts. Derivatives have numerous uses as well as various risks associated with them, but are generally considered an alternative way to participate in the market. (Investopedia on Facebook)
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