How futures are different from stocks?
Stocks are issued by listed companies. When investors buy stocks, they become the shareholder and part owner of that company. However, the derivatives market designs the specifications of futures for trade. Futures are agreements or contracts to buy or sell. The contracts will become effective when buyers and sellers are matched. The number of contracts as well as increase or reduction in the number of contracts depend on matching buyers and sellers.
Highlights of derivatives
1. Low level of investment with a chance of high return: investors who buy or sell derivatives do not have to pay in full but rather deposit a margin about 10 – 15% of the total contract value before trading while the return is based on the total contract value. As a result, when calculating return on investment, derivatives generate higher positive return than stock trading. On the other hand, derivatives may generate higher negative return than stock trading in general.
2. Making profits in both bull and bear markets: In derivatives trading, buyers and sellers agree on how much “price” they will buy or sell in the future. However, the settlement will be completed on a later date. As a result, investors can use “buy first – sell later” strategy to make profits as usual in the bull market or “sell first – buy later” if a bear market is expected. If the futures price moves up or down as expected, investors will gain profits from the price difference.
A derivative is a financial product with a unique specification: the derivatives itself has no value. Its intrinsic value is based upon its underlying asset. Another highlight specification of a derivative is that it has a limited lifetime. When its lifetime ends, its value becomes zero.
What is SET50 Index Futures?
A SET 50 Index Futures is the first product to be traded on TFEX. SET 50 Index Futures is calculated from the stock prices of the top 50 listed companies on SET in terms of large market capitalization and high liquidity. SET50 Index Futures received a No-Action Letter from Commodity Futures Trading Commission (CFTC) of the United States, permitting residents of the United States to trade SET50 Futures listed on TFEX.
What is Stock Futures?
A Stock index futures is a type of futures traded in TFEX. The buyer and the seller agree today at what price and how many stocks will be traded. With this characteristic, stock futures is an interesting product for current stock traders and other interested persons. It is a new alternative to make a profit in two ways by “buy-before-sell” or “sell-before-buy” transactions. Investors therefore can make a profit in all market conditions.
What is Gold Futures?
Trading gold in advance through TFEX as a market place by matching buyers and sellers. The profit and loss are calculated at the end of each business day except on days before the last business day in which the price of gold futures is calculated based on the London Am Fix price and the exchange rate at the closing price. Initially, no physical gold is delivered. However, now TFX has developed a trading process that allows investors to request physical gold delivery (subject to TFEX conditions).