Agreed...I would also would like to see public corporations more concerned about the end user of their products or services instead of the stock holders. Stock holders, in my view, should not have any say in the company. The company should work for the happiness, satisfaction and good health of it's customers. If they do business that way...the stock holders will make out just fine. If the company screws up...then you dump the stock. This is a truer free market view I think.
What do you think?

If an energy consumer buys crude futures, that is a hedge. If the crude price rises, so would their costs as consumer, but they also profit from holding futures. The person on the opposite side of that trade is the speculator, though buyer and seller are not matched like that in the market. The speculator might not be in the position for long, but the hedger probably is.
Hedging is always reduction of risk, like buying insurance. Speculation is always taking on risk.
The meaning of the words are confused in media reports. Like when JP Morgan announced they lost $2bln on a "hedging loss" in 2012, it was worded like that for the regulator's benefit. It would have been less accepted if they said they lost it on a speculation that went wrong.

Did you lose money in the stock market? With derivatives, or just trying to beat the roulette investment wheel? Aw, poor baby. Who held a gun to your head and made you invest?
Who was it who said, "Sure the game is rigged, but if you don't play, you can't win?"
All of life is chancy. Look at the folks who invested in the making of the "Atlas Shrugged" triple header. If I had that much money, I might well have put it in a pile, sat on the pile with my shotgun and dared someone to try to get any of it. But in another way, my gambling was in start-up businesses. I knew I could rely on myself and my willingness to work hard which made up for the lack of funds. (If you do the work of three, you save the wages of two.).

Lol. +1 for you!

Yes. Kaplan, and their competitors all offer study guides. One could probably be found in a library. It covers everything for the Series 7 - registered rep (stock broker). Very good source of basics on registered securities.

Futures and Options are valid for product hedging. For example, a farmer does not know what the price of corn will be in 6 months so does a cost analysis and buys a future to hedge his bets. If he decides to sell his Future contract that is OK. If a broker creates a Futures contract not based on an existing product (in development or planned) and sells it that is NOT OK. Naked shorts in futures market should be banned except the government is using them to kept the price of gold down.

The markets are capitalist by nature. It's only natural that financial operatives will devise products they think they can sell and make money from.
Derivatives aren't all bad. For instance, a steep put option can handsomely reward someone who steps back from the masses, looks at the fundamentals, and determines that an equity is severely overpriced and due for correction. Similar is the reward of a call option for someone who has uncovered an absolute gem, such as a company which has invented a machine that converts atmospheric static into usable energy.

derivatives are neat, especially in differential equations!!! -- j
.

isn't that the way the housing bubble was created? . and
maybe also the dot com bubble? -- j
.

Ultimately though, your are betting for or against a 3rd party that theoretically you have no control over. For the major market-makers, they do and always have tilted the table in their favor.

As you pointed out, who wants to spend their retirement pouring over computer screens every day... ? Easier to enjoy life, and I've always found, easier to control your own business / your own destiny and be certain of the outcomes .

You just split among multiple accounts, each insured for $250,000. That's not a barrier, only if you want bragging rights to show a statement to someone.

I couldn't agree with you more. In the last crisis, they put in short sale bans on some financial stocks. Changing rules is definitely another risk factor with derivatives.

Participating in a free capitalist market is one thing... choosing to gamble your hard-earned money in a rigged system is another... The market-makers are not going to take the bad side of trades, so what is offered for sale are more of the sucker-bets. The odds are probably better than a slot machine in Vegas, but probably not by much.

I've normally equated hedging with risk management and Beta. It's diversification of one's portfolio in case of unforeseen events. Speculation is just a generic term for someone who takes a financial investment position based on where one thinks the market is going. I don't really see the direct connection between speculation and hedging. Hedging can be simply taking equity positions (stock) in two competing companies rather than investing solely in one. Speculation, however, is only really valuable if you are betting against the market in general - if you are convinced that some specific aspect of the market is going to run counter to what everyone else is betting on. To me, that's not an investment with a reasonable expectation of return, but pure gambling. I'd appreciate it if you could connect the dots.

I've been thinking since my earlier reply. Instead of futures (which is just one of many instruments), look from a different angle, the functions of speculation and hedging.
Hedging is reduction of an existing risk, and helps commerce function. Speculation is taking on that risk from hedgers. It is a dependent relationship... hedgers need speculators. The fact that speculation volume can be much larger than the hedgers need just makes a market more efficient.

Thanks for the post SLL. You do a great job of explaining things :-)

Do you recall back in the 1960's (or was it early 70's?) when the Hunt brothers had cornered the market on silver? As I recall the people running the system changed the rules ex post facto so their friends on the losing side of the trades did not actually have to deliver silver.

When the rules can be changed against those of us who are not 'connected' to favor those who are, I want no part of such a market. If you are a particularly astute trader and can see it coming so that you can bail in time more power to you. I'd rather deal with things and people who keep their word.

There are plenty of books on futures trading out there (but I'm not recommending trading, it would be a minefield for "dabbling"). For a layman's overview of the industry, most of those books usually have some good intro chapters. Worth browsing in a bookstore.

Investment is capital applied toward productivity. The bigger question is what type of productivity (if any) you want to enable through your capital and what type of return you want to allow others to use that capital. If you have no intention of allowing others use of that capital - even for a price - I don't see any obligation to do so.

If there was no reason for a security to exist, it wouldn't. Perhaps the only caveat is that these securities should be constrained from being used multiple times as collateral. The entire global GDP is around $60 trillion, so how can derivatives rack up a quadrillion? It can be difficult explaining how the insurance on a product can be worth 15 times the value of that product.

Derivatives are financial instruments that allow banksters to manipulate prices of real commodities.
(This is not to say that there aren't legal, ethical uses for such instruments, but the rules are designed to allow insiders to manipulate prices and manipulate producers of the real commodities.)
They destroy markets. The excuse that they create liquidity is a smokescreen to protect the guilty and hide their unethical manipulation of markets. They can't profit in a free market, so they manipulate it to steal from others.

Fall guy

i have lived off of trading options for the last 8 years...4% return per month on average...i also teach others how to do it...i trade credit spreads and L.E.A.P.s...i let my winners run and cut my losers short...my basic rule is that your money should work hard for you...you should not work hard for your money...with that said, there is a learning curve that takes time to understand the world of derivatives...my email is: mia767ca@aol.com ...i am a retired airline pilot

I've made and lost a lot of money in derivatives (derivative: a financial instrument whose price is derived from another financial instrument, an index, a commodity, or other financial variables) markets, both personally and running a trading desk for a firm of which I was a partner and member of the executive committee. There are things to both like and hate about derivatives. Derivatives--credit default swaps and S and P put options--enabled me to financially express a view that things were going to fall apart during the last financial crisis. Without derivatives, it is almost impossible to speculate and profitt from negative outcomes in financial markets. From my standpoint, that is derivatives' chief benefit. It is the same reason I like playing craps; it's the only gambling game that you can bet either for or against the shooter.

However, the crisis also demonstrated the dark side of derivatives. First and foremost is counterparty risk. Much of the unraveling of the crisis was due to the failure of counterparties (AIG, Lehman Brothers) daisy chaining through an inextricably intertwined system. People who point to the notatial value of interest rate swaps, credit default swaps, and other over the counter derivatives (now estimated at over $600 trillion) are pooh-poohed because most of those swaps are netted by derivatives dealers against swaps going the other way. The net exposures are small fractions of the gross notational amounts. Unfortunately, when a counterparty fails, the net exposure becomes the gross exposure, and that's what happened last time and will happen again.

The counterparty risk contributes to the other big risk in derivatives: liquidity risk. We saw a couple of weeks ago with ETF pricing the liquidity risk in a product whose reference instruments are regulated and priced on an exchange (ETFs are derivatives; their pricing is derived from the price of a basket of financial instruments or an index). When the SHTF, liquidity dries up, and that is even more so when the products are traded over the counter. The market makers for interest rate swaps (by far the largest OTC derivative) and credit default swaps are the giant banks. As a very small participant in the those markets, when my trading desk tried to institute or unwind positions, we were looking at huge spreads. The market makers have fought tooth-and-nail against measures that would make those markets more transparent, or, by bringing them onto an exchange, more competitive. Now, with Dodd-Frank regulations and the Volker rule, those derivative markets, as well as more mundane bond markets, are even less liquid. When the SHTF this time, it won't be a situation of wide bid-ask spreads, it will be a situation of no market at all.

One final note. Now that I've retired from finance, I do not speculate in derivatives. It was hard enough when I had a Bloomberg machine and other computer systems that gave me virtually instantaneous access to information and markets. You have to be completely on top of it to have any hope of success. Without such systems, speculating in derivatives is a sucker's game. For interest rate and credit default swaps, it requires a multi-million dollar stake just to participate.