What is the derivatives market?

The term "derivative" originates from the word "派" (phái), which means group, branch, or belonging to a certain school of thought, and "生" (sinh), which means born, generated, or developed. Therefore, "derivative" refers to something that originates or is formed from an initial source.

In a financial context, "derivative" refers to financial instruments developed or derived from the value of an underlying asset such as commodities, stocks, bonds, or market indices. Derivatives commodities are financial instruments whose value is based on the value of an underlying commodity, which can be agricultural products (such as wheat, corn, soybeans), metals (such as silver, copper), energy (such as crude oil, natural gas), or other assets. From this, it can be inferred that the derivatives market is where investors trade contracts based on the value of the aforementioned commodities.

Benefits of trading derivatives and stocks

Stocks have the potential to generate high returns, but they also come with a high level of risk. The stock market can be volatile, and investors may suffer significant losses during market downturns.

Derivatives commodities help investors diversify their portfolios and minimize risk if the stock market becomes volatile. For example, if the stock market is declining, investors can seek profits from the commodity market through derivative contracts. These contracts can be bought and sold quickly, allowing profits to be locked in on the same day.

Additionally, stock investors can use derivative contracts to hedge their portfolios. For instance, if an investor owns shares in an oil and gas company, they can purchase oil futures contracts to protect their profits if oil prices fall. This strategy can also be applied to stocks in companies dealing with sugar or coffee.

Commodity derivative prices often reflect expectations of major economic factors such as inflation, interest rates, and economic growth. As a result, stock investors can use information from the derivatives market to predict stock market trends.

For example, a rise in oil prices may indicate an increase in stock prices for oil companies like ExxonMobil, Chevron, or BP in international markets, and in Vietnam, stocks like BSR or GAS.

Significant fluctuations in oil prices can also signal changes in the global economic situation. For example, a sudden spike in oil prices may increase the risk of inflation, leading to monetary tightening measures by central banks, which would impact the stock market as a whole.

Source: Compiled by SFVN