Derivatives Trading Hasn’t Shrunk Since the Collapse
The economic collapse led to a stock market retraction that scared people away from the market and limited the number of financial transactions that took place. This led to many significant changes in the way in which trading is conducted. However, one area of the market that did not realize a significant reduction in the number of financial transactions that took place was derivatives trading. There are a number of reasons why derivatives trading did not decrease in accordance with the rest of the market, which will be the focus of this article.
Derivatives involve trading on a position that derives from the price of another item. If you are betting on derivatives involving the oil market, your bets will fluctuate in value based upon the change in the underlying market for oil. If the oil market increases then you will benefit if you are long oil and you will benefit if you are short oil when it decreases in value. Derivatives therefore allow you to access aspects of the market that you would not be otherwise able to and allows you to thereby invest in commodities and other unique investments. Increasing this access to these world markets has been a great boon to investors and is part of a larger trend separate from the recession which is why it did not decrease in accordance with the recession.
In recent years, the average investor has become significantly more sophisticated than they were in the past. There are many reasons for this including a better educated populace. In addition, the internet has had a significant relationship with the number of people who are educated in the art of derivative trading. As more people are able to conduct these transactions without broker assistance, the more derivative trading transactions there will be. The internet has basically democratized investing and has leveled the playing field for professionals and amateurs in investing.
A complex world requires new ways to play the market, part of which is satisfied by trading derivatives. With derivatives, individuals are able to access many aspects of the market that are otherwise inaccessible to them. An example is shorting commodities. It is difficult to short commodities outright, particularly if you do it through shorting oil or gas stocks. There are specific company risks and a company may be a takeover target which would cause the stock to soar. As a result, being able to trade on derivatives relating to the commodities market often provides the best opportunity to profit off of commodities trading, simply by trading derivatives.