What is the difference between a security and a derivative?

A security is a type of financial instrument that has value and can be traded. Stocks, bonds, mutual funds, and other similar products are all considered securities. On the other hand, derivatives are financial products that derive their value from an underlying asset or benchmark. Derivatives are typically used for hedging or speculative purposes. In California, investment law covers both securities and derivatives. The primary difference between the two is that, with securities, individual investors are buying a real asset or product, such as a share of stock or a bond. On the other hand, derivatives are contracts made between two or more parties, and the underlying asset or benchmark can be anything from a commodity to a financial index, such as the Dow Jones Industrial Average. The California Securities Law provides explicit definitions of both securities and derivatives. According to the California Department of Corporations, a security is “any note; stock; treasury stock; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement; investment contract; pre-organization certificate or subscription; transferable share; voting trust certificate; certificate of deposit for a security; or, in general, any interest or instrument commonly known as a ‘security.’” Meanwhile, the California Department of Corporations defines a derivative as “any option, ‘swap,’ warrant, or other derivative instrument, except an instrument (1) for which a security or other interest is already traded on a securities exchange; or (2) issued in a real estate investment trust.” In conclusion, the main difference between a security and a derivative is that securities represent ownership of an actual asset, while derivatives are contracts based on the value of an underlying asset or benchmark. Both securities and derivatives are covered by the investment law in California.

What is the difference between a security and a derivative?

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