Shares vs. derivatives: what investors need to know

SHARES and derivatives each have their distinct place in investing. Understanding the differences between these two financial instruments can help investors use these products effectively to reach their financial goals.

- WENDY MYERS

An easy way to understand what shares are is to think about the meaning of the word 'share. Very simply put, having shares in a company means owning a part of it. An investor who owns a share in a company effectively has direct ownership in the company, granting them rights to a portion of the company's assets and profits and the right to vote in company elections.

The investor will benefit from the company's dividend policy, which contributes passive income to the investor for reinvestment into the market. When considering risk and return, shares typically offer higher potential returns than asset classes like bonds or cash, but also come with higher risk due to the volatility of share price movements.

Derivative products are financial contracts whose value is derived from their underlying assets, such as shares, bonds, commodities, or currencies. They serve various purposes, including hedging risk, speculating on price movements, or providing leverage.