CNN Money is featuring an article discussing derivative investments, in particular, investments designed for the small investor to hedge his or her bets. HedgeStreet is a company that lets people speculate on economic events, such as gas prices hitting $3.00 by a certain date. This hedge, for instance, might be good for someone with a long commute and would like to neutralize the effect of spending more on gas.
In order to invest in the derivatives offered by particular investment company, the investor needs only $100 to open an account, and any trades are limited to $10. The company calls these small items “hedgelets.” At HedgeStreet, the contracts available are based on economic events.
Regarding the gas price event hedgelet, I think it would make more sense to invest directly in oil companies rather than betting on economic events. It seems that oil profits will rise as gas prices go up, but there may be a larger chance of missing any specific price target, in which case the investor would lose all money invested.
If you believe the people who sell these investments, derivatives are poised for growth among regular investors. Others warn that most people who trade don’t understand the drivers of economic events, and those who don’t shouldn’t place bets. Trading online makes it easier for the uninformed to participate. “… Investors who trade online may mistake readily available information on the Internet for knowledge, which can fuel overconfidence and speculation.”
Updated October 9, 2016 and originally published August 25, 2005.