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When it comes to overall exposure to assets, the derivatives market is by far the largest. From foreign exchange to equities, transactions involving derivatives, as opposed to underlying assets, occur all over the world, 24 hours a day, 7 days a week. These markets include forward commitments (forwards, futures, swaps) and contingent claims (options, swaptions) over exposures such as currencies, interest rates and indices. But users of these markets tend not to be everyday investors.
Generally speaking, there are 3 types of derivative market participants: Traders, hedgers and dealers.
Derivative traders: These are what you might call 'investors', but perhaps a better term is 'speculators'. Traders tend to take derivative exposures for a short period of time, looking to make small, short-term gains. These positions may be based on tactical expectations, volatility opportunities or technical patterns (often this last one). Derivatives are a popular tool for traders, owing to their very high liquidity and ability to leverage up capital considerably and cheaply.
Hedgers: These are users that have a natural exposure to the underlying asset or rate, and those that wish to reduce or remove this risk exposure (e.g. a bank with interest rate risk, a miner with commodity price risk, or an exporter with currency risk). Hedgers were the traditional users of derivatives, in particular, forward rate setting for commodities. The derivatives market offers a place for hedgers to transfer unwanted risks in a very efficient manner.
Dealers: These are users that help facilitate trading and hedging and can be split into 2 types - brokers and market makers. The former help to match those looking to buy (long) exposures with those looking to sell (short) exposures, earning a brokerage for their efforts. The latter, buy and sell exposures from other participants, looking to make a profit from the difference between long and short prices. Whilst hedgers were the reason for open derivatives markets, market makers were their creators.
In today's investment environment, investors and fund managers use of derivatives is becoming more common. This may be to tactically adjust a portfolio for a short period of time, or to employ risk protection over a portfolio. But despite their growing usage, care needs to be taken to ensure unwanted risks or excessive leverage do not have unintended outcomes.
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