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The ins and outs of single stock futures trading

by , 06 March 2015

Single stock futures, along with the likes of contracts for difference (CFDs) and spread trading, are derivatives.

Derivative are financial instruments whose value depends on an underlying asset's value. With single stock futures, they derive their value from the underlying share they're based on.

So how do they work?

Let's take a closer look…


How do single stock futures work?


Single stock futures are contracts whose value depends on the value of JSE listed shares.

There are nearly 300 JSE listed shares that you can trade single stock futures on. You can view a list of available single stock futures on the JSE’s website.

The three main features of a single stock futures contract are:

  • Each single stock futures contract is standardised. So each single stock futures contract is for 100 underlying shares. For example, one Standard Bank single stock future is based on 100 underlying Standard Bank shares.
  • The underlying asset for a single stock futures contract is a JSE-listed share.
  • A single stock futures contract is exchange traded through the JSE’s Equity Derivatives Market.

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These three features mean that single stock futures are marketable financial instruments. And this means you can actively trade them.

As you trade single stock futures through the JSE, you have to use a stock broker who offers derivatives trading to buy and sell them. This means that the single stock futures market is a highly regulated environment.


The gearing aspect of single stock futures


One of the reasons that people trade single stock futures is down to the gearing they provide them.

When you open a single stock futures trade, you have to put down an initial margin. This is because you’re exposing yourself to a lot of market risk.

This small margin (deposit) gives you exposure to a large value of listed shares and gives single stock futures their gearing aspect.

Once you have a trade open, if the trade moves against you, you’ll have to provide extra money to maintain your margin.

The JSE sets the margin requirements for each single stock futures contract. Your broker may add on an additional margin charge to cover their risk.

So there you have it, the ins and outs of single stock futures trading.

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