In the previous section, we talked about the basic features of the stock. In this section, we will try to state the differences between a stock and its derivatives.
We can start by saying that the derivative should copy the underlying asset’s price, whether it is an index, a bond, or a stock. However, these are synthetic assets, so when you buy a derivative, you do not gain a stake in the company as when you buy a stock. Derivatives are mainly used for speculation or hedging purposes. For long-term investment, it is recommended to buy the asset directly – ETFs, shares, bonds, etc. In the following table, we can see a brief comparison between shares and specified derivates.
The primary difference is that you can use leverage with CFDs, options, or other derivatives. If you want to invest $ 10,000, you can buy shares for this amount. However, you cannot use leverage (some brokers allow it to do so). We cover it in the following lesson.