In a more specific definition, derivative is a traded financial contract between two or more parties to buy or sold an asset/commodity on an agreed time and price. The future value of the derivative is highly influenced by its underlying asset in the Spot Market.

Stock can be defined as a sign of ownership of an individual or institution in a corporation. The person or institution who owns the stock can claim on the company’s earnings, assets, and rights to attend its General Meeting of Shareholders.

Basically, there are two benefits for stock investors:

1.       Dividend
Dividend is the earning given to the company’s shareholders from the company’s income. The amount of dividend paid to the shareholders is decided in the Company’s Annual General Meeting. To receive dividend, a buyer of a stock  must own the stock for a relatively long period until it passes its ex-dividend date, where he/she will be acknowledged as the shareholder who has the right to obtain the dividend.

2.       Capital Gain
Capital gain is the positive different between the purchase price and the selling price of a stock. Capital gain is formed through the stock trading activities in the secondary market. For example, an investor bought ABC’s stock for Rp 3,000 per share and then sold it for Rp 3,500 per share. It means the investor receive capital gain of Rp 500 for every sold share.

However, like other instruments of investment, stock has its own risks:

1.       Capital Loss
It is the reverse of Capital Gain. It is a condition when the stock is sold for a price that is lower than its original purchase price. For instance, an investor bought the stock of PT XYZ for Rp 2,000 per share, but aftermath the stock price fell to the level of Rp 1,400 per share. Afraid of continuous declines, the investor sells the shares for Rp 1,400 per share. The investor has retained a capital loss of Rp 600 per share.

2.       Liquidity Risk
A Company, whose shares are owned by public, is stated for bankruptcy by the Court or is being dismissed. In this case, the claim of the shareholders’ rights will get the last priority after all the company’s liabilities have been settled (through the selling the company’s assets). The rest of the company’s wealth, if exist, will be distributed proportionally to the shareholders. However, if there is no rest left, the shareholders will not receive anything. This is the worst condition a shareholder might go through. Thus, a shareholder needs to monitor every development happens in the company.

In the secondary market or daily stock trading, stock price fluctuates. Stock price is formed by the demand and supply of the stock, while  the supply and demand of a stock are influenced by many factors, such as the company and industry’s performance, the macro factors (interest rate, inflation, currency rate), the non-economical factors (social and political conditions), and so on..