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Single stock futures uncovered: How the margin works in practise

by , 10 March 2015

At first, single stock futures can appear rather complicated.

There is one main aspect of single stock futures that you need to get to grips with so you can understand exactly how they work. And, more importantly, so you can get closer to trading them.

This aspect is the margin.

Let's take a closer look at how the margin works…

The margin in action

The best way to see how the margin works with single stock futures is to look at an example…

Firstly, let’s assume you want to trade single stock futures on Company ABC.

If Company ABC’s ticker symbol is ABC, its single stock future code will be ABCQ. The ‘Q’ denotes a single stock future.

To open a single stock futures trade you need to decide how many contracts you want to buy. Each single stock futures contract is based on 100 underlying shares.

The number of contracts will determine how much your initial margin is. That is, the amount of money you need to put down to open a trade.

Let’s say the JSE’s Equity Derivatives Market’s margin requirement for an ABCQ futures contract is R625. So if you want to buy ten contracts, you’ll have to put down an initial margin of R6,250 (10 x R625) with your broker.

You need to maintain your margin as long as you’re in a single stock futures trade

As long as you have the trade open, you’ll have to maintain this margin (mark to market).

So if the price of the underlying share moves against your position, your broker will debit your account with the necessary amount. If the share price moves with your position, your broker will credit you with the amount.

This will happen on a daily basis until you close your trade.

Remember, by trading ten single stock futures contracts, you gain exposure to the movement of 1,000 of the underlying shares as one futures contract is equal to 100 shares.

Trading on margin can multiply your profits quickly, but also your losses. This is all down to the gearing aspect gained by trading on margin.

So there you have it. How the margin works in practise with single stock futures.

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Single stock futures uncovered: How the margin works in practise
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