What are derivatives?
Written by Matt Allen - Published 29th July 2026
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KEY TAKEAWAY A derivative is a financial contract whose value is derived from an underlying asset, such as a share, index, currency or commodity. Spread bets and CFDs are both derivatives — they let you trade on an asset's price without owning it, using leverage. That leverage magnifies both profits and losses. |
What is a derivative?
A derivative is a contract between two parties whose value depends on — is derived from — the price of something else, known as the underlying asset. The underlying can be a share, a stock index, a currency pair, a commodity, or almost any market with a price. The holder of a derivative doesn't own the underlying asset; they hold a contract that gains or loses value as the underlying's price moves.
What are the main types of derivatives?
The most common derivatives are futures (agreements to buy or sell an asset at a set price on a future date), options (contracts giving the right, but not the obligation, to buy or sell at a set price), and contracts for difference (CFDs), where two parties exchange the difference between an asset's price at the open and close of the contract.
Spread betting is a UK-specific form of derivative trading: structurally similar to a CFD, but placed as a bet on price movement, staked in pounds per point. CFDs vs Spread Bets
Why do traders use derivatives?
Derivatives offer three things that owning an asset doesn't. First, the ability to go short — to profit from falling prices — as easily as going long. Second, breadth of access: a single account can trade indices, shares, currencies and commodities on the same terms, without the practicalities of holding each — no fund structures, no physical delivery, no foreign exchange accounts. Third, leverage: derivatives are traded on margin, so a deposit smaller than the position's full value controls the full exposure
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QUICK FACT An index such as the UK 100 (FTSE 100) is just a number — it can't be owned outright. Derivatives let you take a position directly on the number's movement, in either direction. |
How do spread bets and CFDs work as derivatives?
Both products track the price of an underlying market without any ownership changing hands. With a CFD, you agree to exchange the difference in an asset's price between opening and closing the position. With a spread bet, you stake an amount per point of movement — if you buy the UK 100 at £2 per point and it rises 30 points, you profit £60; if it falls 30 points, you lose £60.
In both cases the broker quotes a buy price and a sell price around the underlying market — the gap between them is the spread, which is a cost of trading.
What are the risks of derivatives?
The main risk is leverage: because derivatives are traded on margin, losses are calculated on the full position size rather than the deposit, and can accumulate rapidly when markets move against you. Retail clients benefit from negative balance protection under FCA rules, meaning you cannot lose more than the funds in your account — but losses within the account can still build quickly. Derivative prices can also move sharply on news, and markets can gap through expected levels. Understanding these risks — and the tools available to manage them, such as stop-losses and guaranteed stops — matters before trading any derivative.
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IMPORTANT TO KNOW Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. |
Frequently asked questions
Are spread bets derivatives?
Yes. A spread bet's value is derived from the price of an underlying market — a share, index, currency or commodity — making it a derivative. You stake an amount per point of price movement rather than owning the asset.
Why trade a derivative instead of the asset itself?
Derivatives allow you to go short as easily as long, to access markets that can't practically be owned (such as indices), and to trade using margin rather than paying full value. The trade-off is leverage risk: losses are calculated on the full position size.
What is an underlying asset?
The underlying asset is the market a derivative's price is based on — for example, the Barclays share price underlying a Barclays spread bet, or the gold price underlying a gold CFD. The derivative's value moves as the underlying's price moves. The vast majority of Spreadex markets are priced from an underlying market in this way, though Spreadex occasionally makes prices on its own grey markets — for example ahead of a company listing — where no exchange price yet exists.
