Single stock futures basics: What you need to know to be a futures trader

Julie Brownlee, Fsp Invest, 15 May. 2014

Tags: single stock futures, futures trader, futures, trading futures, margin, futures contract

If you want to be a futures trader, you’ll need to get to grips with how trading single stock futures work. It may look complicated at first because of the terminology used. But all you need to do is spend a bit of time getting to grips with this and you’ll be ready to start. Here’s what you need to know…

The importance of the futures contract

A futures contract is standardised. This means it comes with specified delivery dates and specified terms. And it’s for a specified amount.

For example, a single stock futures contract is for 100 underlying shares. So if you buy 1 Sasol future contract, your trade has exposure to 100 Sasol shares.

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You can buy and sell a futures contract. If you buy a futures contract, you’re ‘long’. If you sell a futures contract you’re ‘short’.

You can close your trade by:
  • Selling a futures contract if you’re long; or
  • Buying a futures contract if you’re short.

The role of the margin when you’re a futures trader

When you trade futures, you don’t have to put up the full amount of the futures contract. If you put on a trade, you need to put down a deposit or a ‘margin’. This is a small percentage of the total value, usually between 10% and 25% of your total exposure. This is what gives you the gearing (money multiplying) effect.

Only if you end up taking delivery of the underlying asset will you have to pay for the full amount. This rarely happens when you trade. Generally you’ll close out the trade before then, or roll the contract over into the next expiry month.

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How the price of a future may change

There are three things that tend to influence the price of the future. These are:
  • The price of the underlying asset.
  • The financing costs of the trade.
  • Any dividends paid out on the underlying asset.
So there you have it, what you need to know to be a futures trader.

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