Derivative

A Derivative is a security which has no intrinsic value of it’s own but rather depends on the financial performance of its underlying assets, such as mortgages or credit default swaps.  (see Credit Default Swaps)

Derivatives offer an opportunity to invest in a particular security without actually owning it.  While they can be used to hedge against risks of other investments, they also are prone to steep losses if the value of their underlying assets fall. For those new to investing, such techniques can be quite complicated and highly risky.

Derivatives played a major role in the current financial crisis. SeeWall Street’s Shadow Market.