by Catherine Rein
(last updated June 2, 2009)
There are two major categories of derivatives, privately negotiated over-the-counter (OTC) derivatives and standardized, exchange-traded derivatives known as futures. Derivatives are agreements between buyers and sellers. They are valued based on the underlying asset, which could be a physical commodity, a company stock, a currency or just about any other tradable instrument.
Stock options are also a form of derivative. Trading options can be used in any type of market, up markets, down markets and sideways markets. Options can also be used to protect stock holdings from a decline in the market, produce income against a current stock holding and to benefit from a stock price rise by buying the stock.
You can learn to trade stock options by practicing on a virtual trading account. You are given a set amount of money to practice with. No actual money or investing is involved. You should be aware that trading stock options includes significant risk and is not for every investor. Practicing options trading is a good first step:
After learning to trade stock options, you can begin actual trading by opening a brokerage account. You will be required to get options approval before trading in options. Every brokerage is required to educate investors on the risks of options trading before allowing them to trade. You should continue to read and study education materials and ask for professional advice before beginning actual options trading.
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