Single Stock Futures: Changing Face of Stock Investing
This is part one of a three part series. During this series we will talk about the exciting new investment known as Security Futures. Security Futures debuted in November of 2002. Since then they have been considered one of the hottest investments around.
No where else can you invest in Amazon.com, AOL/Time Warner, GE or many other Fortune 500 companies for only 20 cents on the dollar. In this series I hope to educate you on this new investment vehicle and get you started on a new way to invest in stocks.
Three types of investments are lumped under the heading of Security Futures. Single Stock Futures (SSF), Narrow-Based Indices (NBI) and futures on Exchange Traded Funds (ETF).
Single Stock Futures (SSF) contracts are standardized agreements between two parties to buy or to sell 100 shares of a specific stock in the future at a price agreed upon today. These contracts are obligations and call for physical delivery of the stock. These contracts will also have a minimum movement size of 1 cent ($0.01)/share. With the standard contract being 100 shares, the minimum tick size is 1 dollar ($1.00). Stocks from both the NYSE and the NASDAQ are being traded as SSFs.
Narrow-Based Indices (NBI) are governed by the same basic rules as Single Stock Futures. The primary difference is that in the NBI, you will be trading, at any given time, up to nine stocks specific to a particular industry. They are nothing like the S&P 500 or the NASDAQ-100, which are broad-based indices that measure overall market direction. In fact because of the NBI's industry specific focus, often the NBI will move independent from the broader based indices. NBI has been designed for the airlines, banks, defense, drugs and the semiconductor industry along with 11 other industries that are detailed in my new book Security Futures for Small Speculators.
Exchange Traded Funds (ETFs) are traded and priced similarly to individual equity securities. They were designed to be proxies for a group of stocks. For example, there are ETFs that trade on the NASDAQ that represent the NASDAQ 100 Index. This is known as "QQQ." Then there is the "SPDR" (pronounced spider), which is meant to mimic the movements of the S&P 500, which is also traded on NASDAQ.
This is part two of a three part series. During this series we will talk about the exciting new investment known as Security Futures. No where else can you invest in Fortune 500 companies for only 20 cents on the dollar. In this series I hope to educate you on this new investment vehicle and get you started on a new way to invest in stocks. There are three essential differences between Security Futures and Stocks. Margin, Shorting, and Account Balancing.
Ownership and Margin are two vastly different forms of investment control. Most stock purchasers are used to a corporation listing on a stock exchange, and in turn offering equity or ownership of the company to the public. This ownership is then traded among various investors when they buy or sale shares. Security Futures do not convey the same rights of ownership that stockholders have.
With Security Futures investors put up a "margin" which is also considered a "performance bond". Investors, in most cases, will only have to put up 20 percent of the value of the stock. In return, they are obligated to deliver or receive a specific amount of stock on a specific date, known as the expiration date. This is the only time that stock ownership and rights can be transferred.
Daily Account Balances of Security Futures are real-time oriented. This means that losses and profits are applied to your account daily. Since the margin involved is considered a performance bond, any profits that exceed your margin are immediately available. To access these funds, you do not need to liquidate your position. Simply call your broker and have him send the excess money to you. Unless you specifically close out your position, it will continue to accrue profits or losses. The only way you can access your stock profits is by closing out a position.
Shorting Stocks is discouraged. In fact, it is practically un-American. That's why it isn't a surprise that it is highly difficult and complicated to short stocks on most exchanges. On the other hand shorting Security Futures is no more complicated than taking a long position in futures. The counter party to every futures contract is the clearing firm. This system allows there to be as many "short" futures contracts as there are "long" futures contracts.
This is part three of a three part series. During this series we have talked about the exciting new investment known as Security Futures. No where else can you invest in Fortune 500 companies for only 20 cents on the dollar. In this series I hope that I have educated you on this new investment vehicle and got you started on a new way to invest in stocks. The opportunities in Security Futures take two forms "Hedging" and "Speculation".
HEDGING is defined by Merriam-Webster as taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change.
Several groups benefit from hedging. Investors who have their corporate 401(k) s heavily weighted in their company stock would immediately benefit from using Security Futures. At the drop of a dime, they can protect themselves from the overexposure that a one-stock portfolio gives them toward market downturns. Think Enron. IRA account holders can also tailor Security Futures to their long-term needs.
SPECULATION
Investing in Single Stock Futures is so simple and versatile; it only makes sense that people will no longer want to invest or speculate on individual stocks, as they did in the late 1990s. The major markets, such as NYSE or NASDAQ, over time will lose all of their individual stock speculators to Single Stock Futures.
There are three basic ways to speculate with Security Futures. One is the picking of direction, going long or short. Two is the "spread." When you put on a spread, you are simultaneously buying one contract and selling another in an attempt to limit how much you can lose on a particular trade. Last is "arbitrage." Arbitrage is the simultaneous buying and selling of the same product on two different exchanges in order to profit from the price discrepancy. True arbitrage is risk less.
Noble DraKoln is the author of the best-selling books Futures For Small Speculators and Single Stock Futures For Small Speculators, available on http://www.amazon.com. He is also a well-known Southern California educator through his Small Speculators investing seminars. He has been a futures investor, broker, and analyst for almost 11 years. You can subscribe to his free monthly newsletter at .
