Can you explain ‘Derivatives’ in simple terms?

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Marvin emailed me. Money-words

I had to pause.

He was responding to the Explain Jargon to Clients Tool I shared with him. The tool helps advisors explain common financial jargon in ‘human words’ people can actually understand.

What about ‘derivatives’? After some thought (and consulting some of the Blueleaf team), I replied with this idea:

A financial derivative is just a contract which has a value that is “derived” from the value of other assets the contract is tied to. The assets “underlying” the derivative contract may include stocks, bonds, commodities and currencies but can include just about anything like interest rates, market indexes… and even weather! Derivatives are used to manage risk as well as to speculate. As a result, the same derivative may produce a steady cash flow or act as insurance for one party while swinging dramatically in value for the counter party.

…Not perfect, maybe, but not bad either.

Do YOU like to explain tricky jargon in ‘human words’?  You may like the free jargon tool.

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Carolyn is Blueleaf’s in-house marketing guru. She writes on The Blueleaf Blog to make advisors’ lives easier, offering practice management and client engagement tips where and when they’re useful. Outside of the Blueleaf offices, she can be found running a 10k or cooking her famous chili. Chat LIVE with Carolyn on Twitter @BlueleafAdvisor!
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