One of the easiest ways to earn extra income without giving up your day job is investing in stocks. There are many ways to earn money in the stock market, and one of which is the equity derivatives. But before you decide on it, it is necessary that you know the types of such derivatives.

There are different types of derivatives you need to know and understand before starting investing and trading. To further help you, this article will discuss each of them in detail.

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This is one of the most common and basic type. Investors consider this type as it limits any possible risk. The contract lets traders limit a portfolio for any possible risk or take additional risk based on market movements.

They are most of the time based on stock index and stock itself, and represent the right, but not the obligation, to sell or buy an underlying asset at an established price with a specific time or expiration date.

This is popular to investors who do not want to gamble as much in the trade.

  • Single Stock Futures

Another type of equity derivative contract is the Single Stock Futures. The contract is an agreement between two parties to trade a specified number of shares in the future at an amount determined and agreed today.

  • Warrants

This type of equity derivative contract is far from the usual contracts available in the market today, as it is only issued by a company or a corporation and not by a third party like those of the public exchanges. Hence, not everyone may have access to it.

This contract grants the right, but definitely not the obligation, to sell or buy stock at a determined price on an agreed date. Compared to options, warrants have a longer expiration date.

  • Contracts for difference

This type of contract on the other hand is an agreement between two parties to trade the difference in the asset’s or stock’s price today at the start of the contract to its termination date. Those who trade in this type of contract are more knowledgeable and experienced in the trading industry.

  • Total return equity swap

The fifth type of equity derivative contract is the total return equity swap. The contract trade in cash flow between 2 parties. One gets on the interest payment that is based on a floating or fixed rate while the other pays the reference asset, the return of an asset. The two parties dealing in such contract are called the return receiver and the return payer.

Equity derivatives trading is not as complex as other types of trading in the stock exchange. But, needless to say, it is important that one knows all the information he/she needs to know before pursuing any agreement or signing any contract.

With the many available derivatives in the market today, offered by private or public entities, it is wiser if you know each even if you decide hiring a broker to do the trading on your behalf.