Derivatives consist of any security that 'derives' a value from another instrument. Derivatives mainly consist of options such as puts and calls, as well as futures contracts, rights and warrants. Derivatives usually derive their value from stocks, currencies or commodities.
Derivatives serve the primary purpose of allowing investors to 'hedge' against market risk.
In essence, investors can buy insurance on instruments that they purchase. Derivatives also allow companies that buy or sell various commodities to lock in a price so that prices will be more predictable in the future. Derivatives can be a very risky investment if not used properly and it is therefore highly recommend that one seek independent financial advise before buyin g. Convertible, callable and redeemable securities are related to options and will be discussed in the convertible securities section of the site. There consist of two types of options . . . One key characteristic of options is that they will expire at a given point in time.