Futures are derivative financial contracts obligating the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and set price. So, what are stock futures? Let's explore.
What Are Stock Futures?
A stock futures contract is a promise to purchase or sell shares of the underlying stock with a financial exposure equal to a set number of shares (the contract multiplier) at a predetermined price (the contracted price) on a specific future date.
Since stock futures contracts settle in cash, no shares are actually delivered when the contract expires.
Upon expiration, the contract buyers' and sellers' accounts are credited or debited with profits and losses in an amount equal to the difference between the contracted price and the final settlement price multiplied by the contract multiplier.
The official closing price of the underlying stock as provided by SEHK on the last trading day is the final settlement price.
To offset an open short stock futures position before expiry, a seller of a stock futures contract simply buys back the contract while a buyer sells a stock futures contract to close the open long position.
To ensure that the terms of the contract are upheld, both buyers and sellers of stock futures are obliged to post margin before beginning a position in the market. If adverse market fluctuations cause the margin to drop below the predetermined level, the investor will be required to quickly raise the margin to its original level.
Advantages
A Low Cost Of Transactions
Stock transaction expenses are cheap compared to buying or selling the full number of underlying shares since stock futures contracts are based on the value of several thousand shares.
Short Selling Is Simple
It is simple to establish a short position in a stock futures contract, which enables investors to profit from an expected decline in the value of the underlying company.
Leverage Effect
As the margin required to carry a stock futures position is only a fraction of the value of the underlying stock, hedging/trading activities can be conducted with a smaller capital outlay.
Lower Currency Exposure For Offshore Investors
For global investors with exposure in Hong Kong through stock futures contracts, only the margin to carry the position is subject to home currency price fluctuations.
Electronic Trading
The maximum level of price and market transparency is offered by the HKFE's Automated Trading System (ATS), where orders are electronically matched based on price and time priority, and bid, offer, and transaction prices are promptly distributed.
Clearing House Guarantee
Stock futures are registered, cleared, and guaranteed by the HKFE Clearing Corporation (HKCC), a fully-owned subsidiary of the HKFE, as is the case with other futures and options contracts traded on the HKFE. To efficiently remove counter-party risks among its HKCC Participants, HKCC serves as the counter-party to all open contracts. The duties of a HKCC Participant to its clients are not covered by the HKCC guarantee. Investors should be cautious and diligent when selecting a partner with whom to do business.
Risks of Trading Stock Futures
Futures contracts on stocks have a lot of leverage. Losses from trading in stock futures may be more than the investor's initial margin amount, necessitating the immediate payment of extra margin money. If payment is not made on time, the investor's position could be liquidated, and they would then be responsible for any deficit that arose from or was related to the liquidated position.
As a result, traders in stock futures must comprehend and be aware of the dangers involved, and they must choose whether such trading is appropriate. Before trading, investors are advised to speak with a broker or financial advisor about their suitability for stock futures trading in light of their financial situation and investment goals.
"What Are Stock Futures? Advantages And Risk Of Trading Stock Futures" I hope this article can help you to know about Stock Futures a little better.
