If you’re just getting into investing and you’re unfamiliar with some of the alternative financial products, you may be asking what derivatives trader is. These financial professionals usually work for trading firms buying and selling stock options, futures contracts and other contracts guaranteeing the sale of a product at a set price. The products can be stocks, oil, agricultural crops or any commodity with a price that fluctuates with movements in the market.
Derivatives are typically used to protect investors from unforeseen price fluctuations, although they can just as easily lead to a financial loss. Derivatives traders must meticulously follow the markets in which they trade to assess the value of derivatives. When one investor makes money trading a derivative, another investor loses the same amount of money. In this way, derivatives trading is a zero-sum game.
Companies often pay their employees with a kind of derivative known as a stock option. The employee receives the right to buy the company’s stock at a set price, even if the stock price is higher at the time of purchase. If it’s below the granted price, the employee isn’t obligated to buy the stock.
How to Become a Derivatives Trader
Most traders have a bachelor’s degree in business or a related field and a Financial Industry Regulatory Authority license to trade financial securities. Traders often receive on-the-job training and earn an income from the performance of their trades rather than a salary.
To become a licensed trader, you must pass the General Securities Representative Examination, also known as the Series 7 Exam, according to Investopedia. This test covers the fundamentals of investing and the regulations laid out by the Securities and Exchange Commission. After receiving this license, a trader becomes a member of the stock exchange and is allowed to trade financial securities.
What Types of Derivatives Are There?
Derivatives are a way for businesses to protect an asset or investment by purchasing a contract to buy or sell the product at any time before the derivative’s expiration date. Banks buy derivatives to ensure that investments aren’t negatively affected by interest rate changes. Companies that heavily rely on a certain commodity may also buy derivatives to protect themselves against fluctuations in that commodity’s price. For example, airlines may purchase an oil futures contract to guarantee that they only have to pay a certain amount per barrel of oil, even if the actual price is much higher.
Derivatives traders follow these markets closely to determine how much to pay for a derivative and how much value to place on the commodity. The difference between derivatives and other financial products is that derivatives necessarily have winners and losers. For example, in the stock market, a buyer may buy shares of a stock at a much higher price than the seller originally paid, but the buyer can still make money if the price continues to go up. In a derivatives contract, the person obligated to buy a commodity at a price higher than its value , or sell one at a price below its value, loses money, according to Nasdaq.
Related Resource: Master’s of Finance Online Degree
Derivatives are just one of the multitude of financial products traded on a daily basis. Learning more about what is a derivatives trader can help you decide if professional trading is the career for you.
