A derivative is a security that derives its price from the parent share. Typically these are exchange traded options and warrants.

Option - An option can best be described as a contract between two parties giving the taker (buyer) the right to buy or sell a parcel of shares at a predetermined price on or before a predetermined date.

There are two parties involved in an options contract, the writer or seller and the taker or buyer. The writer writes the option and has the obligation of accepting or delivering the shares. The takers have the right, but not the obligation to buy or sell the shares.

There are two types of options - Calls and Puts.

Call - A call option gives the buyer the option to buy shares from the option writer. You are "calling" shares away from the owner.

Put - A put option gives the buyer the option to sell shares to the option writer. You are "putting" options to the writer.

There are 55 companies on the ASX which have options trading. There are many advantages of options trading, the least of which is leverage. An option can be bought and sold for a fraction of the share price, giving an effective higher return (or loss) on investment for a share price move.

Warrants - Warrants, like options, derive their price from the parent security. Warrants though are issued by banks and other financial institutions and are classified based on whether they have an investment or trading purpose. Warrants may be issued over securities, a portfolio of securities, a share price index, currency or commodities.