Sat. Oct 16th, 2021

Now that you are an experienced investor, you have no doubt come across the term “futures in individual stocks” or SSF. These futures contracts are not exactly new, but they have had a somewhat confusing history that makes them a little more technical than other stock market terminology. This article will try to clarify the definition of futures with individual actions and will show the advantages and disadvantages they offer.

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What are futures with individual stocks?

Futures in individual shares (SSF) are futures contracts between two parties. In these contracts, the buyer (on the “long” side of the contract) agrees on a price of 100 single-share shares. However, the date of sale is on a predetermined date in the future, known as the “delivery date.” On this date, the seller (on the “short” side of the contract) agrees to sell the shares at the agreed price. In other words, an SSF is not really different from the sale of any other stock, although the contractual agreement determines the cost and timing of the sale.

Definition of unique stocks

What are individual actions? Any definition of single securities must recognize that the majority of shareholders own a portfolio consisting of many shares. A single share represents ownership of a specific company, defined through the number of shares you hold. Individual shares are bought and sold through these SSF contracts, and the particular timing of these contracts introduces some other stipulations.

A story of futures in individual stocks

SSFs were banned during the 1980s for no other reason than the fact that the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) could not decide who would have authority over the use of these contracts. It was not until 2000 that President Clinton signed the Commodity Modernization Act (CFMA). This new law ensured that the SEC and the CFMA would share jurisdiction, which allowed SSFs to begin trading in November 2002.

Standard characteristics of futures with individual shares

Each stock futures contract follows a standard form, consisting of the following elements:

  • 100 shares of stock are bought / sold
  • Expires quarterly (March, June, September and December)
  • Fluctuates at a minimum of 1 cent X 100 shares ($ 1.00)
  • The third Friday of the month of expiration is the last day of listing
  • Margin requirement of 20% of the cash value of the shares

Most contracts close long before they expire. Normally, investors can take a short, compensatory position to get out of an open, long position.

Understanding margins

One of the most notable differences between stocks and futures is the use of margins. Traditionally, stock margins are set at 50% for retail investors and 15% for dealers. This allows a stock investor to buy with a margin and borrow the difference, which means he can repay the loan or offset it once the shares are sold.

Future margins work differently. Instead of representing an initial payment of an asset, they serve as the investor’s performance bond in the clearing house. Typically, these margins are low, usually set at around 20% of assets.

Advantages of futures in individual stocks

What are the advantages of futures contracts with individual shares?

Leverage

One of the most discussed advantages of SSF contracts is the concept of leverage. Normally, trading on the stock exchange only grants you a 1: 1 commercial leverage, and that’s a good day. But with futures in individual stocks, you can get much higher leverage. This means that you can use this leverage to control more actions without having to leave a large amount of cash.

Short trade

Many investors appreciate the ability to trade short-term futures with individual stocks, which is not normally the case in the regular stock market. Stock futures allow you to trade short-term or trade long-term, which gives you more flexibility, especially when you see significant market fluctuations.

Save on commissions

Securities brokers generally earn a commission on stock exchange transactions, usually a fixed commission or a percentage of the trade. But often futures brokers are only compensated for the supply / demand difference involved in trading. This means that an SSF contract could be more profitable than other forms of stock trading.

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Disadvantages of futures in individual actions

However, there are some disadvantages of SSF contracts that you may want to consider.

More complex

Many new investors may feel slightly overwhelmed by the number of moving parts involved in a single futures contract. The higher learning curve can be intimidating for new investors, who are more accustomed to the direct processes of traditional stock exchanges.

Less volume and fewer options

The bottom line is that few people trade with this type of security. This could mean that you may not be able to fill your order when you place it, at least not immediately. You may also have significant differences between bid and ask prices. In addition, the market may not always adapt to the demand for a single futures contract in popular stocks.

Higher risk

With a traditional investment, you can only lose what you have invested. But with an SSF contract, you will also lose more than the initial investment. This makes SSF contracts a riskier approach to the stock market than other simplified approaches, although those seeking the benefits of these contracts may weigh the risks and rewards of making an informed decision.

Are futures for individual stocks appropriate?

If you already have a diversified investment portfolio, we recommend that you ask your fund manager or financial advisor if SSF contracts are a good option. Opinions can vary considerably, but the average investor is unlikely to see huge benefits from these contracts unless they are committed to a more rigorous investment strategy. However, since SSFs have only been in operation since 2002, we may see that the market continues to evolve and may become more popular over time.

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More information with Gorilla Trades

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