Derivatives trading involves buying and selling financial contracts whose value is derived from an underlying asset, such as stocks, bonds, or commodities. These contracts can take various forms, including futures, options, and swaps. Traders use derivatives to hedge against risks or to speculate on price movements without owning the actual asset. In derivatives trading, participants can profit from changes in the asset's price without needing to invest in the asset itself. This can lead to higher potential returns, but it also carries significant risks, as losses can exceed the initial investment. Understanding the mechanics of these contracts is crucial for effective trading.