Single Stock Future (SSF)
What Is a Single Stock Future?
A single stock futures (SSF) contract is a standard futures contract with an individual stock as its underlying security. Each contract commonly controls 100 shares of stock. Not at all like possessing the underlying shares, single stock futures don't convey voting rights or dividends.
Not at all like stock options, which give the holder the right however not obligation to deliver the underlying stock (exercise the contract), futures contracts present both the right and obligation to do as such.
Grasping Single Stock Futures (SSF)
Single stock futures, similarly as with all standard futures contracts, give the holder the obligation to take delivery of shares of the underlying stock at the contract's expiration date. The seller of the contract has the obligation to deliver those shares.
The futures market offers the ability to utilize exceptionally high leverage relative to cash or spot markets. Traders use futures to hedge or conjecture on the price movement of the underlying asset. For instance, a producer of corn could utilize futures to lock in a certain price and reduce risk, or anyone could estimate on the price movement of corn by going long or short utilizing futures.
Before the appearance of single stock futures, stock market investors could hedge their situations with options or index futures. Notwithstanding, President Bill Clinton marked the Commodity Futures Modernization Act (CFMA) on Dec. 21, 2000.
Under the new law, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) dealt with a ward sharing plan, and single stock futures started trading toward the finish of 2002. Congress authorized the National Futures Association to act as the self-regulatory organization for the security futures markets.
Risks and Benefits
The major benefit of single stock futures is the ability to build a strategy zeroed in on one individual organization's stock. Beforehand, a portfolio manager, for instance, would hedge with index futures, for example, those in view of the S&P 500 or Value Line Composite Index. Since the portfolio rarely matched the construction of the index, any hedged positions were not perfect. Relationships might have been strong however not strong enough 100% of the time.
Another benefit was the differences in requirements for margin and short selling. Futures streamlined and reduced costs when compared to comparable options strategies and individual stock short selling, separately.
The risks are like different futures contracts in that leverage could enhance losses, as well as gains. Likewise, trading volume on individual contracts was and stays far below that of index futures. That prompts larger bid/ask spreads and a less liquid marketplace.
Global Markets
While the gathering for single stock futures was positive when they sent off in the U.S., activity has blurred over the long run. Be that as it may, this sort of security keeps on registering global interest. Trading in Europe, which pre-dated that in the U.S., remains genuinely active. In June 2020, the Singapore Exchange (SGX) announced the send off of its own single stock futures covering 10 stocks.
In 2017, SGX announced a plan to send off single stock futures for a portion of India's largest companies. The National Stock Exchange of India (NSE), which previously traded single stock futures, requested that the SGX postpone that send off, proposing the market wasn't large enough for every one of the players.
Highlights
- Trading in single stock futures is in many cases utilized as a strategy in hedging equity positions.
- Single stock futures likewise consider greater leverage and short-taking than trading in the underlying stock.
- A single stock future is a contract between two investors where the buyer consents to pay a predetermined price at a future point, at which point the seller will deliver the stock.
- Each single stock future contract is standardized and normally controls 100 shares of stock.
