What is the difference between a security and a derivative?

In Wisconsin, the difference between a security and a derivative can be confusing. A security is defined as a financial instrument that has been issued with the intention of providing a return on investment to the purchaser. Examples of securities include stocks, bonds, and mutual funds. A derivative is a financial instrument that derives its value from another security or asset. This usually means that rather than investing directly in a security, investors instead make bets on the future direction of the underlying asset. Common derivatives include options, futures, swaps, forwards, and warrants. The key difference between securities and derivatives is the risk that each carries. Because securities are issued by a company, the risk can be assessed by researching the company’s financial history. Derivatives carry a much higher level of risk, as their value often moves with the underlying security or asset. In addition, derivatives are often exchanged in unregulated markets, so the risk is much less known and investors can potentially suffer losses in volatile markets.

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What is the difference between a security and a derivative?

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