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How to use single stock futures to profit from the slide in a share price

by , 13 March 2015

If you stick to traditional investing methods, you can only profit if the price of the share you buy rises in value over time. But with single stock futures and other derivative instruments, you have the opportunity to profit from a share price's fall.

So how does this work?

Let's take a closer look…


Trading single stock futures when a share price rises and falls


If you think a share’s going to rise in value, you can put a long single stock futures trade on. In other words you buy shares. This is known as going long.

But if you think a share is going to fall in value, you can put a short single stock futures trade on. In other words, you sell shares you don’t have. This is known as going short or shorting.


How does going short work?


Let’s have a look at how this works with the help of an example…

You have been watching Company ABC. The company’s had a great run recently and you think its share price is due a correction.
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To profit from a potential fall in Company ABC’s share price, you can put a short single stock futures trade on.

Let’s say you decide to put a short trade on Company ABC consisting of ten single stock futures contracts. This is equivalent to 1,000 underlying shares as one single stock futures contract equals 100 shares.

You phone your stock broker and give him your trade instructions. Your broker will then sell 1,000 shares in Company ABC in the market. This means you owe the market 1,000 shares (or you’re short 1,000 shares).

To close your trade, you’ll need to buy back these shares at some stage.


How to make money with a short single stock futures trade


By putting a short trade on, you’re hoping you’ll be able to buy back shares in Company ABC at a lower price than you sold them at.

On your instruction, your broker will buy back the shares in the market and this will close your trade.

When you put a short trade on, to make a profit, you need the share price to drop. If the share price starts to rise, you’ll lose money.

So there you have it. How to use single stock futures to profit from the slide in a share price.

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