Underlying value in investing and trading
When considering investing in derivative investment products, you have probably come across the term ‘ underlying value ‘. The underlying value of a derivative product is the value on which this product is based. Well-known examples of derivative products are CFDs , turbos or futures. Such products that are based on an underlying value are also called derivatives .
Meaning underlying value
The product on which a derivative is based is the underlying asset. This product can take various forms. Well-known underlying assets include:
- Shares
- Indices
- Currency
- Cryptocurrencies
- Raw materials
When a derivative uses an underlying value, this derivative will follow the price of the underlying product. This means that the price of the derivative product does not have to deviate from the underlying product. However, a small deviation is possible due to a possible spread . A spread is a difference between the bid and ask price.
Is the value of the underlying product 100 euros per share? Then this will also be approximately the price level of the derivative product. After all, derivatives, such as CFDs, follow the underlying value.
A logical follow-up question is the question of the usefulness of derivatives such as CFDs and options, when they only track an underlying value. The advantage lies mainly in the fact that you do not actually take possession of the underlying product. With CFDs, for example, you only conclude a contract to settle the price difference between the moment of purchase and the moment of sale. Because you do not actually take possession of the underlying value, leverage can be used . This would not be possible if you were to purchase the underlying product yourself. In addition, derivative products often offer you the advantage that you can go both long (speculating on a price increase) and short (speculating on a price decrease).
Popular underlying assets to trade
A number of products are often used as underlying assets when trading derivatives. We will discuss a number of common underlying assets and explain how you can respond to this with popular derivatives such as CFDs and options.
Shares
Shares are a very popular investment product. Shares are securities that allow you to buy a piece of control and ownership of a company. Don’t know what shares are exactly? Then read our article: ‘ What are shares ?’.
Shares can, in addition to a ‘normal’ investment product, also serve as an underlying asset. For example, you can take a CFD or option on shares. You can then respond to the price development of the share. Shares are a popular underlying asset here, because shares can have a great volatility .
Do you think the share will increase in value? Then you can use a CFD long or a call option to play on this increase. If you are right, you will make a profit. However, if the price moves against your expectations, you will make a loss.
With stock options, an option contract often consists of a certain number of shares. The standard number is 100, sometimes this is deviated from. With CFDs, you do not have to deal with these standard numbers.
Indices
You can also choose to take an entire index as the underlying value instead of 1 specific share. A well-known index in the Netherlands is, for example, the AEX. The AEX index consists of the 25 largest Dutch companies. When you take an index as the underlying value, you are therefore playing on the price development of these 25 companies as a whole. When you take an option on the AEX, this is called an AEX option .
Valuta (Forex)
Forex trading often already works with currency as the underlying value. With Forex (currency) trading, you trade in currency pair developments. For example, you can trade in the pair EUR /USD . Instead of buying real dollars for the euro and selling them later, this form of trading often goes through derivatives. Do you think the Euro is going to rise against the Dollar? Then you can take a CFD long position, do you think it is going to fall then you open a CFD short position .
Forex Trading is usually done through a CFD broker. In many cases, such a broker is also called a Forex broker. Read more about CFDs on Forex .
The Forex market is one of the largest financial markets in the world. You always trade in pairs, you always play on a rise of one currency against another currency.
Cryptocurrencies
In addition to investing in regular currencies as underlying assets, you can also do this with cryptocurrencies. Cryptocurrencies have been on the rise for a number of years and are seen as the currency of the future. You can also take these cryptocurrencies as underlying assets and trade them with derivatives.
For example, cryptocurrencies are often very popular as an underlying asset when trading CFDs. This is because crypto coins have a very high volatility. You probably didn’t miss the Bitcoin story either, when this coin skyrocketed in value.
Raw materials (commodities)
Derivatives are often used in commodities. Instead of physically buying lumps of gold, which you then have to be able to store somewhere, many people choose to use a derivative to purely play on the price development. This can be done very easily with the help of derivatives.
Start investing with derivative products
Do you want to start investing in derivative products? First, find out for yourself which derivative suits you best. Have you made this choice? Then you need a broker that offers this to start trading. View and compare brokers and find a suitable broker.
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