Trading and understanding underlying assets: Definition, explanation, strategy

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As beginners in trading, we often come across terms that sound like technical jargon at first - including the term underlying. In fact, it is very easy to define an underlying in trading. In this article, I will show you what an underlying is, what types of underlyings there are and how they can be traded.

What is an underlying asset? - Explanation for traders

If the term underlying is translated into German, the term Basiswert is displayed as the translation. In general, terms are often translated from English into German in trading, which is why it always makes sense to first look for the translations for the definitions. The dictionary also helps.

According to the dictionary, an underlying is therefore the basis and thus the basis of a derivative. In this context, the trading object is always based on a futures or options transaction. Futures contracts are also included. The price development is always oriented to the underlying and forms the basis for the valuation of the transaction and at the same time serves to determine the price.

To understand this, the buying process must be understood. 

Here is good example from Thai broker - 

ตัวอย่างเช่นหากคุณต้องการซื้ออนุพันธ์ความปลอดภัยนี้ไม่ได้มีมูลค่าเป็นของตัวเองในตอนแรก. แต่ค่ามักเกี่ยวข้องกับดัชนี. โดยเฉพาะอย่างยิ่ง: ตัวอย่างเช่นหากคุณซื้อ CFD ที่มี ฟอเร็กซ์ exness ประเทศไทย 2021 หรือ ETF ของ Dow Jones ดัชนี Dow Jones เป็นเกณฑ์มาตรฐาน. สิ่งนี้เรียกว่า "มูลค่าจริง".

Translation:
For example, if you want to buy a derivative, this security does not initially have a value of its own. Instead, the value often relates to the index. More specifically: For example, if you buy a CFD or ETF of the Dow Jones, the Dow Jones Index is the benchmark. This is also referred to as the "real value".

In addition to the term underlying, other words have the same meaning in trading. An underlying can also be

  •     Underlying
  •     Asset 

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Derivatives and Underlying: How do they belong together?

Derivatives are first and foremost financial instruments. However, as soon as such a financial instrument is purchased, this is also a contractual agreement, namely an agreement to buy or sell an underlying.

In general, an underlying has different manifestations. Assets, indices, investment funds, a commodity, a security or even a share as a CFD can be a derivative and thus form the basis of an underlying.

This is easy to understand with an example. If the purchase of a share is compared with the purchase of a share CFD, it is obvious when an underlying occurs. If you buy a share of Apple, the underlying is the instrument. However, if you buy a share of Apple as a CFD, and thus as a futures contract, then the underlying is the basis. The connection between derivatives and an underlying should now be obvious. The connection is that the development of the value of a derivative is close to the development of the value of an underlying.

Share CFDs - Shares as Underlying Asset

The rights of share owners are often significantly higher than the rights that traders have with other investment instruments. That is why shares are often very popular. However, shares can not only be traded as securities on the stock exchange. It is also possible to trade shares CFDs. How high the costs are in trading shares CFDs depends on the spread, which in turn relates to the underlying.

Indices as CFDs - Indices as Underlying Asset

Trading indices is often a good option, as it summarises the entire performance of various securities. Trading as a CFD is also possible. For example, it is possible to map and trade index funds as CFDs. Furthermore, traders should also know that it is also possible to trade on the leading index or the leading indices of the stock exchange. For this purpose, a CFD can be bought that tracks the Dow Jones, the DAX or another index of a well-known stock exchange.

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