Derivative

A contract whose value depends on the price of another asset, such as a share, index, currency or commodity.

Example

An option on a company's shares, or a futures contract on oil.

Important

You own a contract about a price, not the underlying asset, and many derivatives can lose more than you put in.

Related terms

  • Call Option — A contract giving the buyer the right, but not the obligation, to buy an asset at a set price before or on a set date.
  • Put Option — A contract giving the buyer the right, but not the obligation, to sell an asset at a set price before or on a set date.
  • Futures contract — An exchange-traded agreement to take or make delivery of a stated quantity of a good on a stated future date, held on a deposit far smaller than the notional amount.

Lessons that explain it

  • A contract about a price, not a piece of anything — An option or future is an agreement whose value depends on another asset. You own a right or an obligation with an expiry date, not a share of a business. (10 min)

All 578 terms in the Investing glossary