Investment has become a popular activity lately. Various groups and ages have started to realize the benefits of investing in business.
No wonder, the world's 100 richest people did not acquire their wealth by collecting cash until they had tens of billions of dollars. They built important businesses, so the ownership of their shares continued to grow until they became rich.
One reason why people want to engage in investment activities is due to fear of inflation. Inflation is when the currency we save experiences a loss of purchasing power, making it weaker when exchanged for other currencies. Almost every country in the world experiences inflation in a financial calendar, but some countries have had exceptions, such as China, which had negative inflation.
Nevertheless, it is important to understand the risks when investing. Each investment instrument has its own risks. For example, stocks may experience a decline in price at some point, but the advantage is that they can be sold easily if we need money. On the other hand, properties in Indonesia rarely experience a decline in price, but if we need cash, it takes time to liquidate them.
Child From Security Parent
Investment instruments in modern times are varied. In the past, people only knew about commodities and properties. If wheat had a good harvest, traders would invest by storing the wheat in a warehouse because the price was low, then exchanged it for other valuable goods when the price started to rise.
After commodities, people knew about investment instruments called debt or bonds. In the past, people would place their wealth with others in exchange for a higher return on the amount borrowed. But as time progressed, there were also people who created markets to trade debt securities.
Meanwhile, stocks are a relatively new investment instrument. Even public companies only existed after the Dutch company called the Dutch East Indies sold its shares to the public and created the world's first stock exchange. Since then, various things related to investment instruments have started to develop.
The latest investment instrument to emerge in the investment world is derivatives. Derivatives are derivatives of underlying securities such as stocks to commodities. Examples of derivatives are options and futures that are traded on platforms such as binomo.
People use derivatives to gain profit. Derivatives are usually used for short-term trading of underlying securities instead of long-term investments. Usually, people trade derivatives in the short term instead of investing in stocks for years.
Based On Contract
Derivatives exist because of a contract between two or more parties regarding an asset. Usually, a broker facilitates the contract between the parties.
The contract can be in the form of taking advantage of an increase or decrease in the asset's price. Two popular derivatives are options and futures.
Although often mistaken for each other, options and futures have differences. Options give the buyer the right to buy or sell an asset, but do not impose an obligation to own the asset. Meanwhile, futures give the buyer both the right and obligation to an asset being traded.
Unlike investing in stocks or commodities, derivatives have expiration dates. Most derivative contracts have very short expiration times, some even lasting only a few seconds. This is different from investing in underlying securities where we have the freedom to take action on the assets we hold.
Popular in Trading Platform
As we know, derivatives have expiration times. This makes derivatives often traded or used for trading instead of long-term investments.
Almost every platform that provides trading services uses derivatives to be traded. For example, Binomo, which dragged influencers into court.
Why are derivatives often used for trading? This is because with derivatives we can profit whether the asset we are trading increases or decreases in price. This is different from underlying securities where we only profit if the price of our asset goes up compared to when we bought it.
Most people cannot distinguish between derivatives or stocks, this is because many trading brokers package derivatives in advertising as stock investments. The easiest way to distinguish between derivatives and underlying assets/securities is that derivatives have features to profit when the asset experiences a price drop.
Beware and Warning
As we know, derivatives like options and futures have a limited duration. This makes trading with derivatives riskier because it can feel like we don't have full control over the assets we own.
In addition, some derivative contracts have a leverage feature. Leverage is a double-edged sword that can help you win the battle, but it also increases the risk of serious injury. If you make a wrong trade, the losses you incur will be greater.
Some derivative trading platforms are similar to gambling. They only provide a fixed-rate profit based on your success in trading, even if your trade has grown by 50% when the contract expires. On the other hand, if you lose in trading, you will suffer a full loss.
Since some platforms provide very short contract durations for derivatives, this tends to benefit the broker. The short duration makes people trade more, thus making the broker earn more fees.
As we know, every investment instrument has different risks. Our task is to understand the risks and have a plan to manage them so we don't fall into a pitfall, making us give up and miss out on great investment opportunities in the world.
