✔️ Information reviewed and updated in May 2024 by Eduardo López
One financial instrument can be complemented by another in order to acquire much more value or sustainability.o. This generally happens with assets which have a connection between them. That is why here we will talk about the underlying and how you can understand them to make better decisions.
➡✨What is an underlying?
Basically we can define it as the financial instrument that supports or is connected to another. In other words, it is a financial instrument linked to another derivative instrument thereof, since there are no limits for said connection, so any instrument can be an underlying.
For example, if you buy a bank bond in a CFD, it will be related to the bank's value which, in turn, is directly related to the shares on the stock market. In this way, the stocks would be an underlying of the bond that you bought.
➡✨ How is it linked to the price of an asset?
You should know that the price of a financial instrument or an asset is closely related to the value of the underlying. This is because the underlying is responsible for providing support and support, as we saw in the previous case of the bank.
If the value of the underlying goes up, it will cause the linked financial instrument to also increase in value. Usually, the relationship is positive, although we must also be vigilant, since there may be negative coefficients where the underlying lowers its price, which means that the financial instrument also has a decrease in its value.
It is important to pay close attention to the underlying, especially when we are trading with leverage, as this influences the speed with which values can change. So if you trade financial and underlying instruments, you better pay close attention to their prices.
