A derivative is simply a contract between two or more parties that’s based on an underlying asset or set of assets. Although they sound complex, derivatives represent the modern form of trading that’s been around for centuries.
Derivative trading is used by all types of investors to speculate on the future price movement of a market, without having to purchase the actual asset itself, in the hope of making a profit. So, when using derivatives for market exposure, you place an order or trade (usually online) to go either long or short on a specific market. You don’t own the instrument you’re trading in, you’re simply speculating on the price. If you open a long position, this means you expect the market will increase in value. If you open a short position, you expect the market will fall in value. Depending on the direction of your trade and the market movement, you’ll make a profit or incur a loss.