Derivative Securities: What Investors Need to Know

At Sonn Law Group, our top-rated securities fraud lawyers are committed to promoting investor education. While derivative securities are often mentioned in financial media, many investors have major questions regarding how these complex financial products actually work. Here, we answer three frequently asked questions that investors have about derivative securities.


Derivative Securities: Frequently Asked Questions (FAQs)


What is a Derivative Security?

A derivative security is a complex financial product with a price that is tied to the value of some type of underlying asset(s). More specifically, a derivative is a contract that is tied to an underlying asset. As the name suggests, this financial product ‘derives’ its value from the fluctuations in the underlying asset.

However, the derivative holder does not technically own the asset itself, at least not directly. As derivatives are not hard physical assets, but merely a contract, they will have a defined holding period and a limited lifespan.


What are the Most Common Types of Derivatives?

In the modern world, there are a seemingly endless amount of different types of derivatives available on the market. These derivatives are made up of a wide variety of different underlying assets, and are structured in different ways, often for a very narrow purpose.

You will find derivative securities made up of common stocks, bonds, commodities, global currencies, market indices and much more. The four most common types of derivative securities are as follows:


Are Derivative Securities Appropriate for Retail Investors?

Whether or not derivative securities are appropriate for you depends on many different factors. Though, as a general rule, you should not invest in complex financial products that you do not truly understand. If your broker recommends that you add derivative securities to your account, you have a right to have the investment opportunity clearly explained to you before you make a final decision. Do not be pressured into buying a financial product that you are not comfortable with holding.

Ultimately, derivative securities vary widely. Some derivatives are highly risky, while others are relatively safe. Some derivatives are straightforward financial contracts, and others are almost mind bogglingly complex. Of course, as with any investment, there are risks. With derivatives, sometimes the risks are very high.

Your registered investment advisor has a professional duty to make sure that any derivatives you purchase are well-suited for your unique needs as an investor. If you have lost money because of a bad derivative investment, you should consult with an experienced unsuitable investments attorney immediately. You may be able to hold your financial advisor liable for your losses.


Contact Our Investor Protection Lawyers Today

If you lost a substantial amount of money investing in derivative securities, particularly if you feel that you did not understand the investment, we can help. Please contact our team today to request your free, no risk case evaluation. At Sonn Law Group, we take on all investor losses claims using contingency fee agreements. That means that we do not get paid unless we help you obtain financial relief for your losses.