A Simple Introduction to Single Stock Futures (SSF)
As the Nigerian financial landscape evolves, new investment opportunities and asset classes emerge, offering investors new avenues to diversify and manage risk.
One such emerging asset class are single stock futures (SSF), which are poised for introduction into the Nigerian Financial Market. In this document, we will explore what single stock futures are and why you should consider adding them to your portfolio.
What are Single Stock Futures (SSF)?
Single Stock Futures are derivative futures contracts with a specific stock (shares) as the underlying asset.
Since single stock futures are derivatives, they allow you to speculate on the future price movements of a company’s stock even if you don’t own the shares. This enables you to take a position on whether the price of a particular stock will rise, fall or simply to hedge an existing position in the underlying stock.
Stocks such as MTN Nigeria, Dangote Cement, Access Bank, GTCO, and Zenith Bank have been approved by the SEC for derivative futures and will be launched soon.
Why Should You Add Single Stock Futures to Your Investment Portfolio?
Low Initial Commitment:
When buying stocks or bonds, you typically need to pay the full value of the shares you are exposed to. With derivatives, however, you do not need to pay the full value upfront. Instead, you only need to provide collateral, which is usually a small percentage of the total value of your exposure.
Speculative Opportunities:
If you seek to take advantage of short-term price fluctuations or market trends, SSFs offer opportunities for speculation. You can take a position in a stock without owning the underlying shares. If the price moves in the direction of your position, you will make money; if it moves against your position, you will lose money.
Portfolio Diversification:
Futures in general provide an additional tool to diversify your portfolio beyond traditional equities and bonds. With futures, you can gain exposure to specific sectors or industries without necessarily holding shares in those sectors.
Risk Management:
SSFs can serve as effective risk management tools if you are looking to protect your portfolio against adverse price movements. By taking short positions with SSFs, you can hedge against potential losses in your equity holdings during market downturns.
Sample Scenario:
Consider a scenario where you hold significant shares in a stock approved for derivatives trading. You strongly believe that the prices will decline but do not want to sell your shares because you enjoy regular dividends. In this case, you can take a short position with the single stock future linked to the shares you hold. If the stock price goes down, you will recover your potential loss in the derivatives market. However, if prices go up, you will lose in the derivatives market but gain in the regular market.
As we prepare to introduce single stock futures, investors stand to benefit from this new asset class. Whether seeking to diversify a portfolio, capitalize on short-term opportunities, or hedge against price risk, index and single stock futures provide a valuable addition to your toolkit.
