• Index

Index Futures

WHAT IS AN INDEX FUTURE?

An Equity Index is a calculated average of selected share prices, representing a particular market or sector. 

 

  • Index Futures are derivatives instruments that give investors exposure to price movements on an underlying Equity Index.
  • Market participants can therefore profit from the price movements of a basket of equities without trading the individual constituents. This allows investors to invest or divest in the JSE’s largest shares without the need to buy or sell any shares.
  • As a result, the use of Index Futures provides substantial reduction in transaction and brokerage costs. 
Similar to Single Stock Futures (SSF), an Index Future contract gives investors the ability to buy or sell an underlying listed financial instrument (in this case an Index) at a fixed price on a future date.

  

BENEFITS OF TRADING EQUITY INDEX FUTURES

  • There is a reduced cost of funding for those borrowing money to invest as Index Futures enable investors to gain exposure to South African equities at a fraction of the cost of traditional investments. Your credit history is seen as the same as ABSA, Standard Bank or other big companies etc. as all future contracts are guaranteed by Safcom (the clearinghouse).
  • Gearing, also known as leverage, allows investors the ability to enter into comparatively large positions for a very small initial outlay. Intrepid Capital recommends that our investors put up extra margin (on top of the approximate 10% SAFEX requirement) as a buffer against variation margin calls.
  • You can make money from either a rising or a falling market. Unlike traditional investment products such as stocks, which profit only when the market is going up, you can also make money when the market goes down. 
  • Speculation: Index futures give traders the ability to make money during either a rising or a falling market, this is very attractive to individuals who aim to make short-term profits by taking advantage of price movements.
  • Investors can diversify their portfolios
  • Increased liquidity as indices such as the ALSI and ALMI are highly liquid, which are easy to trade and lead to efficient price making.

RISKS OF TRADING EQUITY INDEX FUTURES

It’s important to highlight that the risk of loss from trading in index futures can be substantial.

  • The main risk associated with Index Futures, is the effect of gearing.

Gearing refers to the ratio between the portfolio value (initial margin and free cash) at any point in time relative to the exposure of the underlying equity index.

  

As a result of gearing, the profit and losses on a position can be more than the initial margin posted. If a margin call cannot be met (client is short of funds), the broker may close the position.

With this being said, it is important that investors understand that gearing works in both directions. At Intrepid Capital we protect our clients through a highly effective risk management tool on the DMA (Direct Market Access) platform that clients use to get access to the market.  


AVAILABLE INDEX FUTURE CONTRACTS:

  • FTSE/JSE Top 40 Index (ALSI): consists of the largest 40 companies ranked by full market value in the All Share Index (J203).
  • MINI FTSE/JSE Top 40 Index (ALMI): has the same constituents as the ALSI Top 40 Index, however the value per index point is a 10th of the ALSI. 
  • FTSE/JSE Capped Top 40 Index (CTOP): is constructed in the same way as the Top 40 Index (J200), but all constituents with a weight larger than 10% in the index are capped at a fixed level of 10% at each quarterly review.
  • FTSE/JSE Shareholder Weighted Top 40 Index (DTOP): has the same constituents as the Top 40 Index the only difference being the constituents’ weightings in the index. The Shareholder Weighted Indices use the share register to reduce constituent weights by foreign shareholding.
  • FTSE/JSE Financial 15 Index (FINI): is made up of the largest 15 All Share Index (J203) companies, ranked by full market cap, that are classified as SA Financials.
  • FTSE/JSE Financial Industrial 30 Index (FNDI): is made up of the largest 30 All Share Index (J203) companies, ranked by full market cap, that are classified as SA Industrials and SA Financials.
  • FTSE/JSE Gold Mining Index (GLDX): consists of 4 precious metal mining companies.
  • FTSE/JSE Industrial 25 Index (INDI): consist of the largest 25 All Share Index (J203) companies, ranked by full market cap, that are classified as SA Industrials.
  • FTSE/JSE Resources 20 Index (RESI): consists of the largest 20 All Share Index (J203) companies, ranked by full market cap, that are classified as SA Resources.
  • FTSE/JSE South African Listed Property Index (SAPI): comprises the top 20 liquid company, by full market cap, in the Real Estate Investment & Services Sector (8630) and Real Estate Investment Trusts Sector (8670), with a primary listing on the JSE. 

Please note: the ALSI, ALMI and DTOP Index Futures are the most liquid index contracts. However if you desire to trade a specific index contract, please contact us and we ensure a buyer or a seller depending on your needs.

For more information regarding Equity Index Futures, please download our Brochure “Index Futures”. Where you will find detailed examples and cash flows.  


BY TRADING INDEX FUTURES WITH INTREPID CAPITAL, WE CAN OFFER YOU:

  • Real time online trading
  • Real time profit and loss statements / reports
  • Competitive brokerage fees
  • Ability to enter, cancel and amend orders online
  • Live streaming prices
  • Intraday graphs
  • Live portfolio values and exposure
  • Trade and price alerts via email and/or SMS

For more information on how Intrepid Capital can help you with Index Future trading, please email info@intrepidcapital.co.za or call us on 011 234 6570 to have a conversation with one of our team