How to trade single stock futures

Fsp Invest, 13 Dec. 2013

Tags: futures, derivative, trading, what are single stock futures, how to trade single stock futures, safex, safex broker, what is a future, futures contract

If you’re desperate to try trading, then you may have heard of single stock futures. These are a financial derivative product. By trading single stock futures, you can take advantage of a rising or falling stock market. Read on to find out how to trade single stock futures…

The single stock future is a derivative product, Gareth Stokes in Fear, Greed and the Stock Market explains...

It derives its value from an underlying share or index.

Single stock futures are a product of the South African Futures Exchange (SAFEX). You can trade single stock futures through any SAFEX registered broker.

If you already have an account with a broker, just check if they offer futures trading.
Single stock futures gives you the opportunity to take advantage of a rising or falling stock market:
  • If you think the market is going up, then you ‘buy’ (or go long) a particular single stock future.
  • If you think the market is going down, then you ‘sell’ (or go short) a particular single stock future.
Single stock futures allow you to leverage or gear your trades by a substantial amount. Each 1% gain in the underlying asset (share or index) means a gain of between 4% and 10%.

Definition: What are futures?

A futures contract is an agreement to buy or sell a fixed quantity (usually one contract) of a specific commodity or financial instrument, at a standard future date at a price agreed between parties to the contract.

One contract is equivalent to 100 underlying shares.

How to buy a futures contract

Let’s say you decide to short (sell) ABC Limited, a paper producer.

You’ve been reading the news on a regular basis and notice ABC has run into a great deal of trouble due to falling paper prices in North America and Europe.

You also notice ABC hasn’t traded profitably over its latest full year. Everything is pointing to a further fall in the share price. Here’s what you do…

You telephone your SAFEX broker and ask him to sell 10 Sappi futures contracts at R29 on the underlying. You’ll have to specify the month you want to trade (usually March, June, September or December). Your broker will let you know the margin for each contract, and will execute the order on SAFEX.

The margin per ABC contract is R525. So for 10 ABC contracts you’ll have to place a margin of R5,250.

So there you have it, how to trade single stock futures.

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