Now that you’re a seasoned investor, you’ve undoubtedly run across the term “single stock futures” or SSF. These futures contracts are not exactly new, but they’ve had a slightly confusing history that makes them a bit more technical than other stock market terminology. This article will try and clarify the definition of single stock futures and show the advantages and disadvantages that they provide.
What Are Single Stock Futures?
Single stock futures (SSFs) are futures contracts between two parties. In these contracts, the buyer (on the “long” side of the contract) agrees on a price of 100 shares of a single stock. However, the date of the sale is at 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 stock at the agreed-upon price. In other words, an SSF is not really different from the sale of any other stock, though the contractual arrangement determines the cost and timing of the sale.
Single Stocks Definition
What are single stocks? Any single stock definition must acknowledge that most stockholders possess a portfolio consisting of many stocks. A single stock represents ownership in one specific company, defined through the number of “shares” that you own. Single stocks are bought and sold through these SSF contracts, and the particular timing of these contracts introduces some other stipulations.
A History of Single Stock Futures
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) couldn’t decide on who would have authority over the use of these contracts. It wasn’t until 2000 that President Clinton signed the Commodity Futures Modernization Act (CFMA). This new law ensured that the SEC and CFMA would share jurisdiction, which allowed SSFs to begin trading in November of 2002.
Standard Features of Single Stock Futures
Every single stock futures contract follows a standard form, consisting of the following elements:
- 100 shares of the 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 expiration month is the last trading day
- Margin requirement of 20% of the stock’s cash value
Most contracts are closed well before they expire. Typically, investors can take an offsetting short position to get out of an open, long position.
Understanding Margins
One of the most noticeable differences between stocks and futures is the use of margins. Traditionally, stock margins are set at 50% for retail investors and 15% for dealers. That allows a stock investor to buy on margin and borrow the difference, which means they can either pay the loan down or offset it once the stock is sold.
Futures margins work differently. Instead of representing a down payment on an asset, they serve as a performance bond from the investor to the exchange clearinghouse. Typically, these margins are low, usually set at around 20% of the asset.
Advantages of Single Stock Futures
What are the advantages of single stock futures contracts?
Leverage
One of the most commonly discussed advantages of SSF contracts is the concept of leverage. Typically, trading on the stock market only grants you a 1:1 trade leverage, and that’s on a good day. But with single stock futures, you can get much higher leverage. That means that you can use this leverage to control more stock without having to put down a large amount of cash.
Short Trading
Many investors appreciate the ability to short trade with single stock futures, something you generally can’t do in the regular stock market. Stock futures contracts allow you to short trade or trade long, giving you greater flexibility, especially when you see major market fluctuations.
Save on Commissions
Stockbrokers generally earn a commission on stock trades, usually either a flat fee or a percentage of the trade. But futures brokers are often compensated only for the bid/ask spread involved in the trade. That means that an SSF contract could be more profitable than other forms of stock trades.
Disadvantages of Single Stock Futures
There are, however, some disadvantages of SSF contracts that you might wish to consider.
More Complex
Many new investors might feel slightly overwhelmed by the number of moving parts involved in a single stock futures contract. The higher learning curve might be intimidating for new investors, who are more accustomed to the straightforward processes of traditional stock exchanges.
Lower Volume and Fewer Options
The bottom line is there are just not many people trading this type of security. That could mean you might not be able to get your order filled when you place it, at least not immediately. You might also encounter large spreads between the bid and ask prices. Additionally, the market can’t always accommodate the demand placed for a single stock futures contract on a popular stock.
Higher Risk
With a traditional investment, you can only lose what you’ve invested. But with an SSF contract, you also stand to lose more than the initial investment. That makes SSF contracts a riskier approach to the stock market than other simplified approaches, though those looking for the advantages these contracts bring can weigh the risks and rewards to make an informed decision.
Are Single Stock Futures Right for Me?
If you already have a diversified investment portfolio, you might want to ask your fund manager or financial advisor if SSF contracts are a good option. Opinions may vary considerably, but the average investor is unlikely to see huge benefits from these contracts unless they’re committed to a more rigorous investment strategy. Still, since SSFs have only been operating since 2002, we may see the market continue to evolve, and they may become more popular as time goes on.
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