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Why we engage in trading futures on individual stocks
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.
