This week we are covering the knotty investment terms that you might have heard about but not really understood what they are.
A derivative is essentially a deal between 2 parties, usually an agreement to trade something at a fixed price, as long as certain conditions are met. A very simple example is an insurance contract. Here is another example by Peter Siris, investment manager at Guerilla Capital “A farmer grows corn, but if the price of corn drops at the time of the harvest, he could go bankrupt. So he buys an insurance policy – a derivative – that guarantees him a fixed price. The farmer plants his crop knowing he won’t lose money”.
Think of a bond as an IOU. You lend your money to a government or a company on the basis that they will pay you back in full, plus interest, on an agreed date.
Imagine a bank creating money out of thin air… Sounds crazy right? But, that is exactly what qualitative easing is. Central bank’s create money out of thin air (I wish I could do that) which is used to boost the amount of money in the banking system. The infographic below sums it up nicely.