Myths And Misconceptions About Financial Derivatives

There have been many myths and misconceptions about financial derivatives and its various implications. Financial derivatives have been cited as one of the reasons for the current recession. Many people have been interested about the economic market and the so-called role of financial derivatives in the downward movement of economy. In order to be enlightened about financial derivatives and the current issues surrounding it, let us clear up some of the common misconceptions regarding the use of financial derivatives.

Common Myths:

1. The use of financial derivatives is only applicable to rich multimillion dollar companies. - This is one of the largest misconceptions about financial derivatives. Many people think that this involves the stock exchange and the complex and abstract financial movements only fit for large companies. Indirectly, we are all participants of the financial derivative cycle through our house mortgages and other loans. As an individual or small business owner, we can engage in and maximize the uses of financial derivatives. The risk management purposes of financial derivatives can benefit even the smallest traders. You do not have to belong to a rich and prestigious billion dollar company to be able to use this financial strategy. Risk management measures are needed in any form of business whether big or small. Business owners and investors that are not big time need not be discouraged because they can use this financial strategy too.

2. Engaging on financial derivative is a form of gambling. - This negative notion on financial derivatives makes people shy away from it. It even creates wrong expectations on people who enter this with the preconceived notion that it is a form of gamble. The financial market is not a game of chance. You enter into contracts and transactions with full consideration of the factors affecting your contracts. This is not purely guessing and a game of chance. You consider all your actions to be able to get the most out of financial derivatives. There is no room for guessing because real risks and real money is involved. Though there is a certain amount of speculation involved in financial derivatives, it is not gambling per se. To engage in financial market transactions, you need wise and planned actions in order to achieve success.

3. Financial derivative transactions only benefit one side of the trade. - This misconception discourages some practitioners to enter into such financial transactions. However, this concept is not true. Financial derivatives are contract based agreements. A contract establishes benefits to both parties involved. This means that both sides will get benefits out of the trade. Nobody enters into transactions to lose. Hence, financial derivatives cannot be benefitting only one side of the coin.

Knowing all these myths and misconceptions makes you fully understand the truth about financial derivatives. This puts you a better position to judge whether you will enter into these financial agreements. Clearing up the common myths surrounding the use of financial derivatives allows you to fully appreciate its use and benefits.