Inflation is a fact of life that everyone must deal with. Even when inflation is "low", it gradually takes its toll on your assets. The result of low inflation is that your purchasing power gradually erodes even though you might have the same amount of money. In order to combat this, you have to earn more or increase the rate of return on your investments. Often a simple savings account won't even pay enough interest to cover the losses due to creeping inflation. In that case, the only way to beat inflation is to take on additional risk to increase your rate of return. Taking on additional risk, however, means that you could suffer other types of losses. So, in order to properly manage … [Read more...]
What are Derivatives and How do they Work?
Derivatives Defined According to Dictionary.com the term "derivative" means 1. derived. or 2. not original; secondary. In the financial arena derivatives are derived from a basic commodity and can be a portion of that original commodity. They are essentially contracts between two or more people. You can think of derivatives as ways of "slicing and dicing" financial contracts. For instance, a normal bond could be broken into two parts. The first part would be the underlying asset itself and any appreciation thereon. The second part could be all the interest due on that bond. This way one investor would get more leverage on the appreciation of the bond while the other investor would … [Read more...]