In the traditional, elementary school understanding of stock, people buy into a company because they want part ownership, and the stock goes up as the company does well and has solid financial strength.
Derivatives seem to be an unnecessary accelerator.
Options are similar to a down payment, or trip cancellation insurance. It gives you the ability to buy something (or not buy it) in the future, but for that privilege you must pay something right now. Options provide leverage (using more money than you presently have), like a credit card or mortgage. Just as most people can't bring piles of cash to buy a car or house outright, options give you the ability to buy the thing but also the chance to walk away. Key caveat: there situations where options that have unlimited risk; these can easily be avoided, but that's where options get their bad reputation.
You're right that both can serve to accelerate growth, and that's a good thing for individuals, companies, and nations. But if things go wrong, crashes at high speeds are much more dangerous than those at low speeds.
However, consider futures, which are very similar to options. Futures were, as I understand it, popularized in Chicago as a way for farmers to be able to get money for their crop right now, at a fixed price. In this way, they could pass the risk -- and a little bit of the profit -- off to people with more capital, who were better able to weather all possible outcomes.
But in practice I think it's not the existence of the derivatives market, it's the size. Our economy is like a town with 1 farmer and 9 investors who spend all day wagering with each other on whether the farmer will have a good crop.
Objectively, that's not true. The finance industry is under 10% of GDP and under 5% of jobs.
- If you own a stock and want to reduce the downside risk, you can buy a put option to ensure you'll always be able to sell your stock for a reasonable price, even if there's a financial crash.
- If you have the ability to produce some product (e.g. grain) but need some extra money (e.g. to buy seed or fix a tractor) or just want to lock in a sale price for your product, you can sell a futures contract.
- If you want need some product at some point in the future (e.g. fuel for your jets) and want to lock in the price, you can buy a futures contract.
Fundamentally, derivatives allow you to trade risk. You can pay somebody to absorb some risk for you or you can accept some risk in exchange for money.
We don't actually know what a company is worth. You can imagine estimating the worth (a.k.a., "net present value") of a company based on its future dividends (or stock buybacks). But any formula will contain a lot of probabilities of when each dividend will occur, the amount, and the discount factor (that is, how much future money is worth today). So what you get is actually a distribution of how much a company is worth.
The stock market doesn't deal with distributions directly. It uses options. A call option is the ability to buy a stock at a given price called the "strike price". So, from the prices for two call options, you can infer the probability that the stock's worth is between their strike prices.
No real option market maker is using anything except the current price of the stock to price their options. This isn't strictly true, but what I'm saying is that people don't determine the fair value of a stock through looking at option prices.
If you want to learn more, check out black Scholes pricing model and option Greeks.
Can't say much on derivatives and others, at least futures made sense as way of fronting money for agriculture :/
You decide you can accept X% risk. You estimate portfolio risk is Y%.
You can enter options positions for the portfolio components to force Y to X.
They're a means of wealth extraction disguised under whatever load of bullshit someone wants you to believe.
I'll even prove it to you. Ask someone with skin in the Wall Street game to explain this stuff to you, not mathematically, but in layperson's terms, so simple that a young child could understand it. They either won't be able to do it, or they won't do it. You'll get one of two answers, "It's really complex." or "It can't be simplified."
When you hear this kind of shit, you're can safely deduce one of two things:
1. The person in question doesn't have a deep understanding of the phenomenon or principle they're trying to explain.
2. The person in question isn't interested in explaining it because it directly affects them.
Ask a Ph.D.-holding, teaching nuclear physicist to explain how a star works. They'll be able to break it down for a 5 year old, a 15 year old, and a 24 year old graduate student, at various levels of complexity.
Ask a Ph.D-holding investment banker or hedge fund manager how all this works. They don't want you to know, because it isn't creating value. Not the kind of value an Amazon or a Tesla creates. It creates value for them and for the large investors they represent. Not for you the layperson.
That's an options contract.
"If you don't clean your room in one week, Daddy is going to take away all your cookies, plus you'll owe Daddy 10 cookies."
OK, I'm listening, what's the proof?