When you trade, you’ll use a platform like ours to access these markets and take a position on whether you think a market’s price will rise or fall. If your prediction is correct, you’ll make a profit. If incorrect, you’ll make a loss.
The financial instruments you’ll use to trade on an asset’s price movements are known as ‘derivatives’.
This simply means that the instrument’s price is ‘derived’ from the price of the underlying, like a company share or an ounce of gold. As the price of the underlying asset changes, so the value of the derivative changes, too.
To understand this, let’s look at an example of speculating on shares. If the price of a share goes up from £100 to £105, the value of the derivative tracking it’ll increase by the same amount. If you bought the derivative at £100, you could now sell it at £105. Although you never own the share itself, your profit or loss will mirror its price movements.
So, why use a derivative?
There are several benefits to using derivatives – and some risks too.
With derivatives trading, you can go long or short – meaning you can make a profit or a loss if that market’s price rises or falls, as long as you predict it correctly. This is because trading isn’t owning the actual financial asset. With owning something outright, such as actual gold for example, you’ll only make a profit if the gold price climbs.
