A derivative is a contract made in the present whose amount/value is based on an underlying asset. The derivates can be on underlying assets like equity, indices, commodities, currency, etc. The prices for these assets are taken as base and then traded for future prices whose payment is to be made later.

When traders speculate the future prices of a stock in the present and form a contract between two or more parties it is called trading on derivatives. It is highly risky and there is a need for in-depth study of the market to trade on derivatives. Derivatives can be in the form of futures, options, warrants, and swaps.

The hedgers and speculators focus on the price difference of a product in different markets. They purchase the asset from one market and sell it in another market at different prices. The hedger owns the asset and the speculator speculates the prices of the asset in the future.

They are the types of derivatives that safeguard the investor from incurring losses. Futures gives the investor an obligation for the contract, whereas options do not give the obligation. Both these types of derivatives work to provide security to the investor against the price fluctuations in the market.

A call gives the buyer the right the purchase the derivative and a put gives the seller the right to sell the derivative. A call option is used to purchase the underlying derivative asset at a prefixed rate on a prefixed date. A put option allows the seller to sell the underlying derivative asset at the present price on a particular date.

Traders have to wait for few days to trade on derivatives in a derivative market whereas trading can be done instantly in a stock market. Derivative trading provides a hedge against security on stocks and is a lot riskier than stock trading. Derivative trading is a complex method and on the other hand, stock trading is easier to understand.

The major benefit of derivative trading is that it provides a hedge against market fluctuations on the prices of the underlying asset. Another benefit is that the trader can determine the price of the underlying asset via speculations and trading. This helps in analyzing the market trends and understanding the stock valuations.