This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

When Picking Stocks, Derivatives Matter

Even if you shy away from derivatives for your own portfolio, there's a good chance they might still affect your stock gains this year. You may not know it, but derivatives can lead to some potentially big effects on the financials of companies that invest in them -- something worth knowing if you're thinking about plopping down some cash on a stock. Here's a rundown on investing in companies that use derivatives.

Those Darned Derivatives

By now you've heard plenty about using derivatives as an investment choice, but what if one of the companies you're thinking about investing in uses them too? It's a scenario most investors -- and even some analysts -- probably don't even consider.

But I'll admit I'm a little partial. I've got accounting on the brain. I've been spending the last couple of weeks on the financial audit of "a Fortune 500 energy company," and as you might expect, they use lots of derivatives in their day-to-day business.

And that's the case with lots of other kinds of companies, too. Everyone from Southwest Airlines (LUV - Get Report) to Allegheny Energy (AYE) use derivatives (like futures and forwards) to hedge against commodity prices, multinationals use derivatives to limit their exposure to foreign currencies, and financial services companies use derivatives for all sorts of applications.

That all sounds really savvy, but as long as the share price keeps climbing, who cares if companies use derivatives, right? Wrong.

Since U.S.-based companies use "generally accepted accounting principles" ( GAAP) when they deliver their financial statements to investors, it's important to think about some of GAAP's quirks when you're valuing a company to make sure you find any hidden value or "value traps."

1 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,655.84 -16.76 -0.09%
S&P 500 2,049.24 -2.58 -0.13%
NASDAQ 4,751.3460 -6.5330 -0.14%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs