A Look at Derivatives and Precious Metals

There's a world of investing outside of stocks and bonds . And that world can be quite a lucrative one -- so much so that some investors completely eschew the more traditional investments that we've grown accustomed to (see "Allocate Your Assets Like a Pro"). So, what exactly do "nontraditional" investments like derivatives and precious metals have to offer you?

Derivatives

While often talked about in the financial world, derivatives are probably unfamiliar to most investors. Essentially, a derivative is any financial instrument that gets its value from another financial instrument. A couple of the more prevalent types of derivatives out there are options and futures.

Stock options give their owners the right to engage in a stock transaction at a predetermined price. For example, if you have an option to buy a share of Google(GOOG Quote) at $100 (a call option ), the value of the option is derived from the value of Google's stock. If Google's share price increases, the value of that option increases, because you're getting a more valuable share of stock for that $100. Conversely, if Google's share price drops, so does the value of your stock option.

Futures can be similar to stock options, except they generally involve commodities like crude oil, gold and sugar (futures can actually be less accessible to individual investors than stock options).