What is gearing?
is when the potential positive or negative outcome is magnified. It’s this magnification aspect of gearing that makes trading instruments like single stock futures higher risk to traditional investing.
Single stock futures are geared products. You obtain this gearing effect by trading on margin. In other words, putting down a small deposit to gain exposure to a large number of shares.
Let’s have a look at how gearing works with the help of an example…
How to calculate your trade’s gearing
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Say you trade single stock futures on Company ABC. The margin requirement for a single stock futures contract of Company ABC is R625.
The JSE’s Equity Derivatives Market sets the margin requirement for each share there is a single stock futures contract available for. Each contract is equal to 100 underlying shares.
If you buy 10 contracts of Company ABC, you need to put down an initial margin of R6,250 (10 x R625).
To calculate the gearing of your Company ABC trade, you first need to look at your total exposure. To do this check the ruling share price of Company ABC and multiply this by the number of shares in the trade.
This gives you R75,000 (R75 x 10 x 100).
To calculate your gearing, you divide this exposure by your initial margin. So for you example, this is 12 (R75,000/R6,250).
This means you’re 12 times geared. In other words, each R1 of your initial margin gives you exposure to R12.
So there you have it. How to work out your gearing when you trade single stock futures.
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