What is an underlying asset?
An underlying asset is a security that underlies and therefore drives the pricing of other assets, such as derivatives or other more complex securities. Common underlying assets include stocks, commodities, bonds, interest rates, and currencies. Derivatives, futures, and options all derive their values from the underlying asset's price.
Different types of Underlying Assets
There are various types of underlying assets; these include stocks, securities, commodities, currencies, and derivatives—each posing its own unique set of advantages and disadvantages. Stocks offer individuals a share in the ownership of a corporation and entitle the owner to its profits or dividends.
Secured bonds allow investors access to regular income streams with a guarantee that their principal sum is secure; whilst commodities such as gold provide an alternative form of investment due to their reliability as well as potential value appreciation.
Furthermore, investing in currencies through familiarising oneself with fluctuations can also prove beneficial; this coupled with investing in derivative products based on commodity prices can contribute positively to one’s overall investment portfolio.
Benefits and risks associated with the underlying asset
Investing in underlying assets is one of the most popular investment strategies today, as it can potentially lead to sustainable and significant financial returns. However, due to its volatile nature, this strategy also carries certain risks. While the potential payoff can be quite high, those who are not experienced in mitigating risk through diversification could potentially lose large sums of money. It is important to have a tight grip on research to make wise decisions when investing in underlying assets.