Why we engage in trading futures on individual stocks

AllianceCan — Thu, 07 Apr 2011 21:24:33 GMT

Now, when there is clarity on what is a contract for futures on individual stocks, the next question: "Why engage in trading futures on individual stocks?". On this question there are many different answers.

As with all other trading futures contracts, futures on individual stocks gives an investor the opportunity to trade a product without having to actually own the property.

In 1974, the rule of "T" Federal Reserve Bank has established the requirement for a guarantee fee to be placed on public sale shares of 50% for small investors and 15% - for the dealers. Thus, an investor who buys shares on the Stock Exchange with a guarantee fee, takes the difference in debt and may either pay this "loan", or compensate for it when the shares are subsequently sold.

On the other hand, the margin on futures contracts, whose sizes are determined by each individual exchange futures, are not paid in installments, but are a guarantee of the contract before the clearing house by the investor. Although the margin are different, as a percentage of the underlying assets, yet they are quite small.

For example, the offering price of S & P 500 currently stands at about 303,500 dollars, but the initial margin for the investor is only 26,950 dollars, or 8.9% of the price. LIFFE now requires an initial margin in the range 7-15% of the value of the shares in their contracts for Universal Stock Futures.

Unlike an investor in stocks, buying in view of the indemnity payment, an investor in futures do not have to pay interest, as payment - not "credit" and the obligation to perform the contract. This allows you to perform a futures investor leverage its position as an initial investment binds less capital and more cash is available for future investment.

In addition, futures on individual stocks - a great way to hedge stock positions. If the expected short-term drop in stock prices, shareholders may sell futures to offset possible losses without having to physically sell the shares themselves. Investors may also use futures on individual stocks to gain from the expected fall in the stock price by selling the futures contract. As the price of futures contracts linked to the price of stocks, futures seller may redeem it for less money than it was sold, and profit. Similarly, the price of the underlying stock can rise, which could lead to losses for the seller to the futures contract. Obtain an equivalent income, using the shares themselves, it becomes more difficult. It is also important to note that investors will be able to sell futures on individual stocks without the need to observe the rule of the growth of share price (uptick requirement), existing for the shares.

Futures on individual stocks allow investors to use the difference in quotes between stocks, buying futures on a stock and selling of another. Perhaps as a position of relative quotes shares against the market index, using the same strategy.

Another advantage inherent in futures on individual stocks, is that the investor can adjust the dependence of its shares from the market power by selling futures on their equity and buying futures on the shares more attractive, without implementing an expensive operation in the market goods on hand.

Finally, futures on individual stocks are attractive the operating flexibility they provide to investors. Investors may be to trade futures on individual stocks as from their securities accounts, as well as with futures accounts. From traders in securities will not be required open futures accounts, and futures traders will not need to open securities accounts, as required by industry standards. Furthermore, brokers of the securities is not necessary to obtain a license for operation in futures and futures brokers - on securities transactions.

Like all futures contracts, futures on individual stocks characterized by a significant degree of risk. An investor could lose all the funds that it was originally deposited with the purpose of trading, and even beyond that. In addition, stock exchanges, offering such contracts can impose restrictions on the number of contracts that may be one of the investor at any given time.

The official website of canadian forex brokers

Why we engage in trading futures on individual stocks