Are you still confused on the term "Derivative"? Let my try to simplify further...
Let's say you have an ORANGE. It's a very common fruit.
You put in a blender.... you get ORANGE JUICE.
ORANGE JUICE is a derivative of the fruit orange. You derived the juice from the fruit.
What happens if you want to make ORANGE MILKSHAKE? You put in some orange juice + a bit of milk + a scoop of ice-cream. Orange milk shake is a derivative of orange juice, while orange juice is a derivative of orange.
In other words, orange milkshake is a derivative of a derivative of the fruit orange.
CFD is a derivative... because CFDs mimics the prices of underlying assets (stocks, indices, commodities). CFDs are traded directly with the broker and not through an exchange such as the SGX. You are not buying the underlying assets directly.
Why are some derivatives like Collateral debt obligations (CDOs) TOXIC? They are the ones which caused the financial crisis in 2008? Some CDOs - called "synthetic CDOs" - are bundles of CDS and other credit derivatives. This means they are derivatives of derivatives.
Let me use an analogy:
The fruit orange itself is fresh. If just eaten in its pure form, most likely you will not get any diarrhea. But if you make it into an orange milkshake... what if the milk has gone sour? What if the ice-cream has expired? You add the bad milk with orange juice.... you drink and you will get LAO SAI (diarrhea).
I hope I make it simple enough for common people to understand.
