Derivative trading with small starting capital: a guide to building wealth

Many investors are reluctant to invest in derivatives, especially since the financial collapse of Lehman Brothers in 2008. This article shows how you can build wealth even with small monthly amounts.

The most important question first: Is derivatives trading dangerous?

Every investment has a risk. Anyone who invests in securities or other financial instruments should always bear this in mind. However, there have been many changes for private investors since the Lehman Brothers crash and the resulting pull effect on the financial market. They serve to protect investors and limit risk. 

Any company wishing to offer trading in derivatives must have a licence and an international label. This applies not only in the European Union. The LEI number for Canadian companies in this area is mandatory too. This is intended to ensure transparency and security on the global financial market.

Deciphering the code

The LEI code consists of 20 characters that contain both letters and numbers and encode specific information about the company. This global system helps to make transactions traceable and secure worldwide. It reduces risk and increases confidence in the financial market by establishing a clear link between legal entities and their financial transactions.

50 USD/CAD per month: investment for the cautious

With an initial capital of USD 50/CAD per month, investors can enter the world of derivatives trading, for example by buying options and futures. Such financial instruments make it possible to speculate on underlying asset movements without owning the underlying assets outright. In particular, options on well-known share indices, which are characterised by lower volatility and better predictability, offer a solid starting point.

Diversification as a component of success

Investors should not put all their eggs in one basket in order to successfully build wealth over the long term. After all, the financial market is always subject to fluctuations. The more widely the risk is spread, the easier it is to limit and offset losses in certain areas. A combination of shares, bonds and perhaps even property ETFs is recommended. This ensures a good mix of growth potential and security.

Different asset classes often react differently to the same economic events. While equities may perform well when the economy is booming, bonds can offer security when markets are volatile. By spreading their capital across different investments, investors can offset losses in one area with gains in another.

Conservative or risk-averse: there is something for all investors from as little as USD 50/CAD per month

For risk-averse investors, investing USD 50/CAD per month in cryptocurrencies can be an option. This asset class is known for its significant volatility, which allows for rapid price movements and therefore potentially high returns. However, this high return potential comes with a correspondingly high level of risk. Investors who are prepared to accept the fluctuations could benefit from targeted investments in promising cryptocurrencies or by trading on the basis of market analyses.

Alternatively, risk-tolerant investors could also invest in small or newly launched technology funds. One of the funds that falls into the category of emerging technologies is the ‘Global X Robotics & Artificial Intelligence ETF’. It invests in companies worldwide that are making significant progress in the field of robotics and artificial intelligence. The fund offers investors the opportunity to participate directly in the development and growth of technologies that drive industrial automation and intelligent systems. 

Another example is the ‘Amplify Transformational Data Sharing ETF’, which focuses on blockchain technology. This ETF invests in companies that use blockchain solutions in various industries such as financial services, healthcare and supply chain management.

For conservative and less risk-averse investors, a monthly investment of USD 50/CAD in high-quality government bonds could be a wise choice. Funds such as the Vanguard Total Bond Market ETF offer broad diversification into high-quality government and corporate bonds, making them a safe investment option that protects against equity market volatility.

Best case: How the consistent investment could pay off

With a monthly investment of USD 50/CAD and an assumed moderate annual return of 5%, the invested capital could grow to around USD 3,400/CAD after five years. After ten years, this sum could increase to around USD 7,764/CAD. These calculations assume a continuous investment without additional deposits and a constant return, which is rarely the case in practice.

Invest 100 USD/CAD per month      

With a monthly investment capital of 100 USD/CAD, it is advisable to pursue a diversified investment strategy in order to build up assets in the long term. The National Bank of Canada suggests that you should have saved the equivalent of one year’s salary by the age of 35. The use of derivatives can accelerate growth and thus support this goal.

Appropriate mix and risk management

A suitable mix of different financial products helps to hedge the portfolio against market volatility. Around 40% of the monthly investment capital, i.e. USD 40/CAD, should be invested in broadly diversified equity ETFs such as the ‘Vanguard S&P 500 ETF’. This ETF offers broad diversification and a solid basis for the portfolio, allowing long-term growth opportunities in the equity market to be utilised.

In addition, around 30% of the capital, i.e. USD 30/CAD, can be invested in individual high-dividend stocks. Examples include companies such as ‘Johnson & Johnson’ or ‘Procter & Gamble’, which are known for their reliable dividend payments and stable business models. These stocks offer regular income streams and potential capital growth.

To further stabilise the portfolio, 20% of the capital, i.e. USD/CAD 20, should be invested in high-quality bonds or bond funds such as the iShares Core U.S. Aggregate Bond ETF. These offer stable returns and act as a safety net in volatile times.

Diversification and risk minimisation

The remaining 10% of the capital, i.e. USD/CAD 10, could be invested in alternative investments such as commodities or REITs (real estate investment trusts). An example of this is the ‘SPDR Gold Shares ETF’, which enables investment in gold, or the ‘Vanguard Real Estate ETF’, which invests in property. These alternative investments offer additional diversification and can serve as a hedge against market risks.

By combining different financial products, the risk is spread and the potential for high returns is maximised at the same time. Investors should regularly review the performance of their investments and make adjustments where necessary. An important aspect of risk management is regularly reviewing and adjusting the portfolio to ensure that it remains in line with personal financial goals and risk tolerance.