For centuries, the stock market has been the game of choice for people interested in investing their money in risky but possibly profitable ventures. The stock market is often described as “the great game” since it takes a combination of skill and luck to strike gold in this dynamic and highly competitive world.

The origin of this great game can be traced back to 12th century France, where so called courratiers de change made a living managing the debts of agricultural communities on behalf of banks. These courratiers de change could buy and sell debts and was thus an early form of financial market brokers.

During the 14th century, bankers in Venice began trading in government securities. The trade became so significant that the Venetian government was compelled to issue a law in 1351 forbidding the spreading of rumors intended to lower the price of government funds. From Venice, the great game of dealing in government securities spread to the nearby city states Pisa, Genoa, Florence and Verona. What these five city states had in common was that they were independent, i.e. not ruled by duke but by a council of citizens.

Considering the above mentioned piece of Italian financial history, it is not surprising that Italian companies were the first to began issuing shares. Companies in England and the Low Countries followed in suit, and the Dutch East India Company (founded in 1602) became historical by being the first joint-stock company to establish a fixed capital stock. Continuous trade in company stock emerged as a result – the great game of stock trading had truly started.

Now, the center of financial innovation was no longer Italian city states but Amsterdam, the thriving capital of the Low Countries. It was here that trade in derivatives, options and repos was firmly established, adding new fascinating aspects to the great game. As early as 1610 the government decided to ban a new invention that remains as controversial today as it was back then – short selling.

Today, people all over the world engage in the tantalizing game of stock market trading and even those that don’t are affected by the events of the equity market.  Modern wannabe traders can trade from their computers and use practice accounts to learn how to trade with stocks, binary options and other financial instruments.

What Does the Stock Market Do?

At the simplest level, the stock market is where people buy and sell shares of stock companies. That’s the easy answer—the one you hear on day one. But if you stay around long enough, you realize the stock market does way more than just move money between buyers and sellers. It also help businesses grow and the stock market has become an integral part of how our modern economy is functioning. Without a stock market, companies would struggle more to raise money, investors would have to look for other ways to invest in enterprises. It would also be more difficult for individuals to build a nest egg for the future without taking on personal legal liabilities (e.g. run their own business in their own name).

Most people interact with the stock market not by trading every day, but by investing in it for the long term. Retirement accounts, pension funds, college savings plans—all of them often depend heavily on the stock market to grow wealth over time. Historically, the stock market has delivered better returns than most other types of investments, like bonds, gold or real estate, if you’re willing to stay in through the ups and downs. It’s not smooth sailing. Crashes happen. Bear markets can drag on for years. But zoom out over decades, and the general trend is up. Companies innovate, economies grow, and the stock market rises along with them. For everyday people, the stock market is one of the few places where your money can realistically grow faster than inflation eats it away, without you taking huge risks and taking on big responsibility and liabilities.

What Are Stocks?

A stock represents shared ownership in a company. If you own 1 share in Apple, you are one of Apple´s many co-owners. Stocks, also known as company shares, are claims on a slice of everything that company owns and earns—its buildings, its products, its profits, its future potential. If you own stock in a company, you’re not just betting on its success – you are one of the co-owners.

As a shareholder, you have the right to attend and vote at shareholder meetings, provided that your share is a share with voting rights (most shares are).

To buy stocks you need a brokerage account with a stock broker. The best way to find a broker is to visit Broker Listings and compare different stock brokers.

Why Companies Sell Stocks

Companies sell stocks to raise money. Let’s say a company needs cash to expand—maybe it wants to open new stores, hire a bigger team, build a factory, or put a lot of resources into research and development. Instead of taking out a loan and pay interest on it, it can sell ownership shares to investors. In return, the company gets a pile of cash it doesn’t have to pay back. Investors get shares, and those shares can rise or fall in value depending on how the company performs, how the economy moves, how investors feel about the business overall, and several other factors.

One of the things stock exchanges do is help businesses raise money in this fashion in an efficient way. Instead of personally contacting individuals, convincing them to become co-owners in your business, you list your business at a stock exchange and give investors easy access to co-ownership through stock brokers. Going public—selling shares to investors through a stock exchange—lets the company raise huge amounts without owing anybody interest.

Investors who buy those shares now own a piece of the company. If the company does well, the value of those shares usually goes up. If the company stumbles, well, investors take the hit too. The stock market, including the stock exchanges, acts like a bridge between companies that need money and people willing to bet on them.

What Stockholders Actually Own

Owning stock doesn’t mean you get to walk into the company’s headquarters, grab a chair, and start giving orders. Your ownership is passive. You have rights—but you wont get to call any shots unless you own a lot of the total amount of shares.

As a shareholder, you have the right to vote at shareholder meetings, provided you have shares with voting rights. The basic type of company share will have voting rights, and represent one vote at the shareholder meeting, but there are specialty shares that work differently, so it is important to know what you are buying and what types of shares the company have issued. Some specialty shares have no voting rights, while others shares represent more than one vote.

Examples of things that may be voted on during a shareholder meeting is dividend payments and who sits on the board of directors.

Dividend payments are a part of the company profits that the company elects to pay to its shareholders. Once again, which type of share you hold is important. A company is not allowed to discriminate any shareholder within the same class of shares, but it is allowed to only pay dividends on a certain class of shares or pay different amounts per share to different classes of shares. Dividend payments, and how they are distributed over different classes of shares, must be approved through a vote at the shareholder meeting – the board can not approve this on their own.

Stocks give you exposure to a company’s success, but they also expose you to its risks. Nothing’s guaranteed, and the stock market’s not famous for being gentle. Owning shares is betting on the future of a stock company. If the company does well or looks promising to investors, your shares can become more valuable over time. If it struggles or crashes, your shares could drop in value—or, if it goes bankrupt, become worthless. Even though some companies are considered less risky than others, you always risk losing the money you invest in the stock market. Proper diversification is important – do not put all your eggs in the same basket.

How Stocks Trade

When a stock company is publicly traded, it is listed at a stock exchange and the shares traded there. Stock exchanges are organized markets, and you have probably heard about exchanges such as the New York Stock Exchange (NYSE) and Nasdaq.

Stocks can also be sold outside stock exchanges, and this is known as over-the-counter trading (OTC trading).

Stock prices move because supply and demand changes. If demand goes up and buyers are willing to pay more, the price goes up. If supply goes up and sellers are willing to sell for less, the price drops.

A company’s actual business performance affects the stock price, sure. But so does investor sentiment, rumors, headlines, earnings reports, market psychology, economic trends, industry specific conditions, and much more.

Different Types of Stocks

As we have mentioned above, not all stocks (company shares) come with the same terms and conditions.

• You’ve got common stocks, which are what most people own. They usually come with voting rights and the potential for dividends.
• Then there are preferred stocks, which act more like a hybrid between a bond (lending money to the company) and a company share. Preferred shares get preferential treatment when it comes to dividends. They also get paid before common shareholders if the company is liquidated. Usually, preferred stocks do not have voting rights. With some preferred stock, the company has the right to pay back the loan at any time and take the stocks back.
• Some stocks come with more voting rights than common stocks. It can for instance be a way for the founder of a company to keep control even after the company has made its IPO.

The Stock Market as a Price Discovery Tool

Every second the market’s open, a vast amount of buy and sell orders flow in, each one reflecting someone’s opinion about what a company is worth right now. Not last week. Not six months from now. Right this second. The stock price you see isn’t just a random number. It’s the result of that constant battle between buyers and sellers. It reflects optimism, fear, rumors, earnings reports, global politics, interest rates, and sometimes just pure emotion. Without a market setting these prices in real time, we’d have no reliable way to know what companies are really valued at by the market, i.e. what other people are willing to pay for it.

The Stock Market as a Reflection of Society

It’s easy to think of the stock market as cold and mechanical. Just numbers, charts, earnings reports. But the market is a living, breathing reflection of human behavior. Fear, greed, hope, panic, excitement—all of it shows up in price movements. When investors are confident about the future, stocks climb. When they’re scared, stocks crash. The market doesn’t predict the future, but it reacts to it very fast.
Elections, wars, pandemics, revolutions, new technologies—all leave fingerprints on the stock charts. If you want to know how people feel about tomorrow, the market can give you an indication.

The Stock Market as a Risk Management Tool

In the last 150 years, owning stocks has been one of the most reliable ways for regular people to grow wealth over the long term. Companies grow, economies expand, innovation happens—and over time, the stock market tends to rise along with it. But stocks don’t go up in a straight line. They crash. They correct. They wobble. And you have to be able to stomach the short-term chaos if you want to enjoy the long-term growth. Owning stocks is having co-ownership in a real business doing real things. And the more wisely you choose which businesses to back, the better your chances of seeing serious rewards over time.

The stock market doesn’t just offer growth; it offers choices. You can buy comparatively low-risk, dividend-paying stocks in large and well-established companies if you want steady income and are okay with slow but steady share price increases over time. You can load up on tech startups and other types of exciting growth stock if you want high risk and the potential for high reward. The type of stock you own matters a lot in how much risk you’re taking and what kind of returns you might expect.

Clever investors typically build a stock portfolio that is comprised not only of stocks in the different companies, but stocks carefully selected to achieve the desired balance of risk and reward. Exactly where on the spectrum you want your portfolio to fall is up to you, and you may also have reasons to adjust your positions over time. A young investor saving for retirement can for instance be more open to taking bigger risks, since there is plenty of time to ride out market cycles. An older investor getting close to retirement will probably wish to reduce risk, and maybe also shift the portfolio over to more income-generating (dividend-paying) stocks. You can balance stocks with other assets, such as bonds, cash, and commodities to smooth out volatility. Instead of investing directly, you can do it through mutual funds and exchange-traded funds (ETFs).

Without a functional stock market, it would be more difficult and costly for investors to employ these diversification strategies. Through the market, you can manage risk to match your goals. Retired and want steady income? Focus on blue chips and dividend aristocrats. Young and can handle some heat? Growth stocks and speculative plays might be the move. The market gives you the ingredients. You make the soup.

What is Blue-Chip Stock?

Stocks in giant, stable companies are commonly called blue-chip stocks. Think McDonalds, Apple, Microsoft, and Coca-Cola. They are considered comparatively low risk, but as always, there are no guarantees and there are examples of blue-chip companies falling on hard times or even liquidating.

Investors tend to add more blue-chip companies to their stock portfolio when they want more stability and slow but steady growth. The Coca-Cola share price is not likely to suddenly rise like a rocket, but it is likely to provide dependable growth over time.

Many blue-chip companies also have a long track record of paying dividends to their shareholders, and this is very appealing to many investors.

What is Growth Stocks?

Growth stocks are companies that are growing fast or are expected to soon start growing fast. It is a more risky investment, but it can pay off big time if you get it right. Imagine if you had invested in Apple back in the day….

You can not expect dividend payments from growth stock, because they will be reinvesting everything into growth.

What is Value Stocks?

Value investors carry out fundamental analysis and look for companies that they believe are under valued by the stock market right now. To put it simple, value stocks are stocks where a fundamental analysis of the company yields a higher value than the price that the stock market is putting on the company right now. Value investors buy value stocks and hold on to them, expecting the market to realize its mistake soon or later.

Stock Exchanges Around the World

Amsterdam is no longer the heart of stock trading; it is instead in New York – a city known as New Amsterdam from 1625 to 1673.

The largest stock market in the world, measured by average daily trading volume and overall market capitalization, is the New York Stock Exchange, NYSE. New York is also home NASDAQ, the world’s second largest stock market.

New York Stock Exchange, NYSE

For many, the New York Stock Exchange (NYSE) is more or less synonymous with the great game that is stock trading. Located on the iconic Wall Street in Lower Manhattan, NYSE averaged a daily trading value slightly above 153 billion U.S. dollar in 2008. The NYSE trading floor is located at 11 Wall Street and consists of four trading rooms where the game of trading takes place. Since NYSE’s merger with the electronic stock exchange Euronext in 2007, the exchange is operated by NYSE Euronext.

In 1966 the NYSE Composite Index was created and given a value of 50 points, based on the market closing on December 31, 1965. Unlike the Dow Jones Industrial Average, founded by Charles Dow in 1896, the NYSE Composite Index reflects the value of a very large number of stocks traded on NYSE. (The Dow Jones started out with 12 stocks from leading U.S. industries and was increased to 30 stocks in 1928.) The NYSE Composite Index covers over 2,000 common stocks listed on NYSE, including roughly 360 companies that are not based in the United States. Of the 100 included companies with the largest market capitalization, 55 are not based in the U.S. In 2003, the NYSE Composite Index set a new base value of 5,000 points based on the market closing on December 31, 2002.

In the New York Stock Exchange, the great game of trading takes place Monday to Friday from 09:30 to 16:00 EST.

NASDAQ

The NASDAQ Stock Market, also known simply as NASDAQ, has nearly 2,900 listed companies and more trading volume than any other electronic stock exchange in the world. Since 1998, NASDAQ is headquartered in New York. Before the relocation it was based in Washington D.C.

The acronym NASDAQ originally stood for National Association of Securities Dealers Automated Quotations, but that is no longer the formal name. NASDAQ uses a screen-based system for trading and is operated by the NASDAQ OMX Group.

NASDAQ has four indices:

• NASDAQ-100
• NASDAQ Biotechnology Index
• NASDAQ Composite
• NASDAQ Bank

If you wish to use NASDAQ to participate in the stock trading game, these are the opening hours:

• Pre-market session 07:00-09:30 EST
• Normal trading session 09:30-16:00 EST
• Post-market session 16:00-20:00 EST

Nasdaq OMX Nordic

NASDAQ OMX Nordic cover markets for Helsinki, Copenhagen, Iceland, Tallinn, Riga, Vilnius and Stockholm.

The London Stock Exchange (LSE)

Founded in the late 1600s, the London Stock Exchange (LSE) is one of the oldest extant stock exchanges in the world. Today, the LSE lists thousands of companies from over 60 different countries. It is thus not just a place to gain exposure to English or British companies like BP or Unilever. Instead, it is a major hub for domestic and foreign mining firms, banks, and multinational corporations that want access to investors. London also plays a huge role in foreign exchange and derivatives markets, making this city one of the beating hearts of international finance.

Trading on the LSE can feel a little different compared to United States exchanges. It’s less focused on tech startups and more weighted toward traditional sectors like energy, finance, and natural resources.

If you want exposure to old money, emerging markets, and heavyweight industries, London is where a lot of the real action happens. Brexit resulted in an exodus of many stock listings from the LSE, but it remained the most valued stock exchange in Europe despite this.

Background

The Royal Exchange, founded by the financier Thomas Gresham and Sir Richard Clough, was opened by Queen Elizabeth in 1571. It was modeled on the Antwerp Bourse.

In the 1600s, stock brokers began gathering in establishments close to the Royal Exchange. They were not permitted in the exchange itself, because they were considered to be too rowdy. One of the places where they gathered was Jonathan´s Coffee-House, and this is where a broker named John Castaing began posting commodity prices and exchange rates a few days a week. In 1761, 150 brokers and jobbers established a stock trading club, and when they built their own house in Sweeting´s Alley in 1773 the named it New Jonathan’s. New Jonathan’s was eventually renamed The Stock Exchange, which eventually became The London Stock Exchange.

The Tokyo Stock Exchange (TSE)

When Japan rebuilt itself after World War II, it didn’t just rebuild factories and cities—it built an economic powerhouse. The Tokyo Stock Exchange (TSE) grew alongside it, and today, it’s the largest stock exchange in Asia by market cap. Trading hours on the TSE run on Tokyo time, so it’s ahead of Europe and North America, offering unique early moves that can sometimes set the tone for global markets later in the day.

Japanese stocks sometimes get overlooked by American traders, but that’s a mistake. Japan’s economy is massive, its companies are global giants, and the TSE is deep, liquid, and highly developed. The TSE lists some of the world’s most famous companies: Toyota, Sony, Mitsubishi, Honda, Nintendo – the list goes on. While Japanese markets can sometimes seem slow compared to the volatility of U.S. stocks, the depth and stability they offer make them a key part of the global picture.

Background

The Tokyo Kabushiki Torihikijo (Tokyo Stock Exchange) was established in 1878, under the direction of Finance Minister Ōkuma Shigenobu and capitalist advocate Shibusawa Eiichi. In 1943, this exchange was combined with 11 other stock exchanges in Japan to form a single Japanese stock exchange: Nippon Shōken Torihikisho (Japan Stock Exchange). Nippon Shōken Torihikisho was shut down on August 1, shortly before the atomic bombings of Hiroshima and Nagasaki. After the end of World War II, the Tokyo Stock Exchange (Tōkyō Shōken Torihikijo) opened in 1949, pursuant to the new Securities Exchange Act.

Euronext

Instead of being tied to a single country, Euronext is present in several cities throughout Europe, and it’s bigger than many people realize. The market captures everything from luxury brands and major industrial firms to tech startups growing in the quieter corners of Europe, and you will find heavy hitters like LVMH, Airbus, L’Oréal, and TotalEnergies listed across Euronext’s platforms.

Because Euronext touches multiple economies, it tends to reflect European-wide sentiment more than any single country’s political drama. That makes it a unique way to play broader European trends without getting stuck inside just one national story.

In late 2023, Euronext operated nearly 2,000 listed issuers with a combined market capitalization of roughly €6.6 trillion. While chiefly famous for equities, it is also the world´s largest center for debt and funds listings, and it plays a key role in global commodities trading since it runs Nord Pool for power trading and Fish Pool for fish trading.

In addition to its main market, Euronext also operates Euronext Growth and Euronext Access, where small and medium-sized companies can list.

Hubs

• EuroNext operates major stock exchanges in seven cities: Euronext Paris, Euronext Amsterdam, Euronext Brussels, Euronext Dublin, Euronext Lisbon, Borsa de Milano (Borsa Italiana), and Euronext Oslo Børs.

• Euronext N.V. is registered in Amsterdam, but the operational headquarters are in Paris.
• Euronext Paris accounts for more than 80% of Euronext´s total market cap. The Paris Bourse is one of the older ones in Europe and dates back to 1724.
• Euronext´s clearing house, Euronext Clearing, is headquartered in Rome.

Background

The roots of Euronext go all the way back to Europe´s first bourses; they ones established in Bruges (1285), Antwerp (1485), and Amsterdam (1602).

In its present form, Euronext was created in September 2000 when the bourses in Paris, Amsterdam and Brussels merged. Since then, Euronext has expanded through mergers and acquisitions, and its work towards a more coherent European stock market has been helped considerably by the introduction of the Euro and the step-by-step financial market harmonization carried out within the European Economic Area (EEA) in the 21^st century.

In 2014, Euronext was spun off from the Intercontinental Exchange (ICE) following ICE`s acquisition of NYSE Euronext the year before.

The Shanghai Stock Exchange (SSE)

The Shanghai Stock Exchange is one of the largest in the world by total market cap and home to some of the biggest Chinese companies. Companies like PetroChina, ICBC, and China Mobile trade here. But it’s not just old-school state enterprises anymore—China’s tech scene, healthcare, and green energy sectors are growing fast.

The “A-shares” on SSE are issued by companies traded in the currency renminbi, and they are usually limited to domestic investors. The “B-shares” are traded in foreign currencies and more accessible to global players, although recent reforms have blurred those lines.

In 2019, the Shanghai Stock Exchange launched the STAR Market, a special market for technology-related companies.

The SSE is tightly regulated by the Chinese government, and market interventions are not unusual. It is a non-profit organization directly administered by the China Securities Regulatory Commission (CSRC). Prices can move sharply, rules can change quickly, and politics can sometimes outweigh pure fundamentals. But if you’re serious about Asian investing, learning how to navigate the SSE can be worth it.

Background

An exchange system was present in Shanghai as early as the 1890s, but the current version of the stock exchange in Shanghai was not established until 1990. In the 1980s, the Chinese leadership enforced several economic reforms aiming to develop a type of socialist market economy, and this eventually led to the re-opening of a stock exchange in Shanghai. During the early years, this exchange was considered an “experimental point”.

Until 1997, the Shanghai Stock Exchange was under municipal control, but in 1997 both the exchanges in both Shanghai and Shenzhen were brought under direct central government control – a move that affirmed the government´s commitment to letting them grow into something more than just “experimental points”.

The Hong Kong Stock Exchange (HKEX)

Where Shanghai feels tightly managed, Hong Kong plays it looser. The Hong Kong Stock Exchange (HKEX) has been a gateway between China and the world for decades, offering more freedom, better access for foreign investors, and a wider variety of companies. Big Chinese firms like Alibaba, Tencent, and Ping An Insurance are listed here, alongside banks, real estate giants, and global multinationals. HKEX also sees a lot of dual listings, where companies are traded both in Hong Kong and on mainland Chinese exchanges.

Trading on HKEX can be fast and volatile, especially around political events, Chinese policy shifts, or moves in the yuan. The exchange acts almost like a pressure valve for regional money flow—and sometimes, a weather vane for how Asia feels about risk.

Background

There was a securities market in Hong Kong as early as the 1860s, but the stock market was not formally established here until 1891, when the Association of Stockbrokers in Hong Kong came into existence. The name The Hong Kong Stock Exchange was not used until 1914.

Back then, Hong Kong was a colony of the British Empire, having been ceded by the Qing dynasty in the early 1840s as a result of the Quing dynasty losing the First Opium War. The colony expanded from being just Hong Kong Island to also include the Kowloon Peninsula in the 1860s, and it was in this environment that stock trading emerged. In 1898, the United Kingdom obtained a 99-year lease of the New Territories, which further expanded the colony.

By the early 1970, this small colony had no less than four stock exchanges in operation. After several pushes for consolidation, the company Stock Exchange of Hong Kong Limited was formed in 1980, but trading on this exchange did not commence until 1986. The first derivative warrant was listed here in 1989 and the first China-incorporated enterprise (H share) in 1993.

In 1997, the colony was handed over to China, who now rules Hong Kong under the principle of one country, two systems. In 1999, the Hong Kong Exchange, the Hong Kong Futures Exchange, and their respective clearinghouses merged into a new holding company named the Hong Kong Exchanges and Clearing Limited.

The Shenzhen Stock Exchange (SZSE)

If Shanghai represents China’s giant state companies, Shenzhen is where the entrepreneurial spirit lives. The Shenzhen Stock Exchange is younger, faster, and much more tech-heavy than its big brother in Shanghai. It’s the home of the ChiNext market—basically a Chinese version of Nasdaq—which lists emerging growth companies in tech, biotech, and green energy. If you want to catch the next Tencent or BYD Motors early, Shenzhen is where a lot of that action starts.

The pace here is faster. The companies are smaller. The risks are higher. But so are the potential rewards if you catch a winner. Shenzhen matters because it’s the part of China’s financial world most directly tied to future innovation rather than the legacy state industries of the past.

Background

The Schenzen Stock Exchange was founded in 1990, in line with the same economic reforms that lead to the re-opening of a stock exchange in Shanghai. Just like the Shanghai Stock Exchange, the one in Schenzen was initially under municipal control and considered an “experimental point”, and then became directly managed by the China Securities Regulatory Commission in 1997.

Stock Derivatives

In the context of financial speculation, a derivative is a financial product that derives its value from something else. In the case of stock derivatives, that underlying asset is a share price.

When you use a stock derivative, you are not buying the stock itself. You’re buying a bet about the share price. You do not become the owner of the stock and you do not get any voting rights or dividend payments.

Stock derivatives are used in various ways, including speculation and hedging against risk. One factor that is appealing to many is how you can use derivatives to gain exposure to a bigger position with less money up front.

Still curious about stock derivatives? Keep reading and we will dig into what they are, how they work, and why they matter way more than most people realize.

What Are Stock Derivatives?

A stock derivative is a contract. Instead of trading the stock itself, you’re trading a contract whose value moves depending on what the stock does.

If the stock price goes up, the value of the derivative might go up – or down, because that type of derivative also exist. If the stock price drops, the derivative might lose value – or increase in value because of how the derivative is designed. Derivatives can be structured to profit when stocks fall, or when they rise, or when they stay flat, or when they move a lot (even if you don’t know which direction). They open up strategies regular stock ownership can’t give you.

Derivatives exist because real people—fund managers, companies, traders—need tools to manage risk and control exposure. Imagine you’re a pension fund sitting on millions in stock. You want to protect yourself against a short-term market dip without selling everything and triggering massive taxes and fees. The solution? You buy put options as insurance. Or imagine you’re a big trading firm that thinks volatility is about to explode. You could trade stock futures or options to capitalize on that without touching the underlying shares.

Derivatives also create liquidity. They let people move in and out of market positions fast, without needing to physically buy and sell tons of stock every time they change their mind.

Stock Options and Stock Futures – Two Major Types of Stock Derivatives

Two of the most commonly traded stock derivatives are stock options and stock futures.

Stock Options

A classic stock options give you the right, but not the obligation, to buy (if it is a call option) or sell (if it is a put option) a certain amount of company shares at a specific price by or on a certain date (depending on the type of option).

• Call option: Since this gives you the right to buy stocks, it is a bet the stock price will rise
• Put options Since this gives you the right to sell stocks, it is a bet the stock price will fall

Imagine you think Apple’s stock will go up. Buying 100 shares outright requires a lot of money (and might incur stamp tax in some jurisdictions). So, instead of buying shares, you decide to buy a call option that lets you buy those 100 shares later at today’s price. If you’re right, and the stock climbs, that option’s value increases—because now you have the right to buy cheaper than market value. If you do not want to exercise (use) the option, you can just sell it for profit at any time during the lifetime of the option provided that the shareprice is high enough to keep the option valuable. (When an option can be sold for a profit, we say that it is in-the-money)

If you’re wrong? You lose the premium you paid for the option, but no more than that. You known when you go in to the deal exactly how much you can lose, and this allows you to take a very calculated risk.

Options offer leverage—bigger exposure for a smaller upfront cost—but unlike a company share, they expire. If the price move doesn’t happen in time, your option will expire worthless (out-of-the-money). If you buy shares instead, you can elect to just keep the investment, hoping for things to improve in the future. You can hold on to shares for ever – and as long as the company doesn´t liquidate, there is always a chance of future profits.

Today, a vast majority of all stock options are cash-settled. This means you will get paid in cash into your trading account if your stock option expires in-the-money. You do not actually get the right to buy the underlying shares and become the owner of them, or get the right to force someone else to buy shares from you. If it is actually important to you to become the owner of stocks (or get to sell stocks), you need a different contract than a cash-settled stock option.

Stock Futures

Stock futures are less common than commodity futures and index futures, but they do exist.

With a stock option, you get the right, but not the obligation, to carry out a certain transaction at a future point. You decide if you want to exercise that right or not. With a stock future, the situation is different, because both you and your counterpart are obligated to carry out the transaction. (What happens if neither of you want to? You offset the stock future by entering into another offsetting contract.)

Of course, if you find a willing buyer, you can get out of the stock future contract by selling it on, and there is definitely a market for stock futures. Stock futures are highly standardized contracts and they are bought and sold on exchanges.

Because they’re standardized and exchange-traded, stock futures are suitable and efficient for institutional trading—perfect for hedging big portfolios or speculating on broad moves in stock indexes. Futures trading is less flexible than options but can be brutally efficient when used correctly.

They carry massive leverage too. That’s great when you’re right.
That’s a nightmare when you’re wrong.

Derivatives Trading and Risk

Derivatives are powerful—but power cuts both ways. The leverage involved means you can lose money far faster than you would with regular stock ownership. Options can expire worthless. Futures can call for margin you don’t have. Movements that would just be uncomfortable in a regular stock position can turn catastrophic in a leveraged derivative play. That’s why pros constantly talk about solid risk management when it comes to derivatives. Used properly, stock derivatives are tools. Used recklessly, they’re explosives that will wipe out your account.

Derivatives are very popular among day traders as they provide leverage and liquidity. You can read more about different types of derivaties and how day traders use the on DayTrading.com.

Retail Traders And Stock Derivatives

Today, everyday retail traders have way more access to derivatives than ever before. You don’t have to be a Wall Street pro to trade stock options on Robinhood or speculate on stock futures on platforms like NinjaTrader or Interactive Brokers.

Just like other traders, retail traders use stock derivatives in a variety of ways. You can for instance hedge a stock portfolios against drops, amplify small price moves for bigger returns, bet on volatility rising or falling, or build complex strategies like spreads or straddles (betting both ways).

Always respect the risk and stick to a suitable risk-management plan. Size your positions small in relation to your total trading account, accept losses quickly, and never forget that in derivatives, survival matters way more than looking smart.

This article was last updated on: May 5, 2025