Introduction to Stock Index Futures

© PhillipCapital 2010. All Rights Reserved.

Introduction to Stock

Index Futures

MR TEO PAUL SIMONStrategist, Phillip Futures


Disclaimer

The information contained in these course materials provided is the option of the Course Trainer and not Phillip Futures. These course materials contain information of a general nature only and are produced for investor education purposes only. They do not constitute investment advice in any manner whatsoever or have any regard to the specific investment objectives, financial situation or individual needs of any particular person receiving them. Examples are used for illustrative purposes only and do not constitute investment advice.

Phillip Futures, or the course trainer, makes no guarantee, warranties, representations of any kind whatsoever, express or implied, including but not limited to, the accuracy, completeness, merchantability, or fitness for any particular purpose, of such information or as to the results obtained by any person from the use of any information or any financial instrument mentioned in the course materials.


Content

• What is a Stock Index

• What are the characteristics of Index Futures

• What Indices are available for trading

• Why trade in Stock Indices


What is a Stock Index

An Index is a statistical measure of the changes in a basket of stocks representing a portion of the overall market. – Investopedia

A stock market index is a method of measuring the value of a section of the stock market. It is computed from the prices of selected stocks. - Wikipedia

A stock index is a compilation of stocks constructed in such a manner to track a particular market. – About.com



Interesting facts

The first stock index, the Dow Jones Industrial Average was created by Mr. Charles Dow back in May of 1896.

At that time, it contains 30 of the largest and most influential companies in the U.S.



Stock Indices be traded through…

•Futures/Options Contracts

•ETFs (Exchange Traded Funds)

•CFDs (Contracts For Differences)

•Structured Products


E.g. Components of Singapore MSCI Index (SIMSCI)

SINGAPORE TELECOM

SINGAPORE PRESS HLDG NOBLE GROUP YANGZIJIANG SHIPBUILD

DBS GROUP HOLDINGS

SINGAPORE TECH ENGR. GOLDEN AGRI RESOURCES

OCBC BANK SINGAPORE AIRLINES SEMBCORP MARINE

UNITED OVERSEAS BANK

CITY DEVELOPMENTS COMFORTDELGRO

KEPPEL CORP GLOBAL LOGISTIC PROP KEPPEL LAND

CAPITALAND JARDINE CYCLE & CARRIAGE CAPITACOMMERCIAL TRUST

GENTING SINGAPORE PLC

HUTCHISON PORT TRUST CAPITAMALLS ASIA

FRASER AND NEAVE

SEMBCORP INDUSTRIES UNITED OVERSEAS LAND

WILMAR INTERNATIONAL

CAPITAMALL TRUST OLAM INTERNATIONAL

SINGAPORE EXCHANGE

ASCENDAS REAL ESTATE INV STARHUB



Sector Name Weight%

Financials 49.92

Industrials 24.28

Telecommunication Services 11.77

Consumer Discretionary 8.49

Consumer Staples 5.54

E.g. Components of Singapore MSCI Index (SIMSCI)



Characteristics of a Futures Contract

• Allows you to go Long (buy) or Short (sell)

• Leverage investment (small deposit allows you to control a big contract size)

• Most index futures are very liquid• Huge amounts of contracts traded everyday• E.g. E-Mini S&P contract has an average of 300,000 contracts traded daily

• Exchange-governed• Exchange will undertake your counter-party credit risk• Assurance that your funds are safe and your trades will be honoured

• All Future contracts have expiry dates


Indices that we can trade:

Asia and Asia Pacific Indices

- MSCI Singapore Stock Index (SIMSCI)- MSCI Taiwan Index- China XinHua A50 Index- Japan’s Nikkei225, standard and Mini- Hong Kong Hang Seng Index, standard and Mini- India CNX Niffty Index- Sydney SPI200 Index

What Indices are available for trading?


Indices that we can trade:

Europe and U.S. Indices:

- London FTSE 100- German DAX- French CAC40- Dow Jones Index ($5, $10, $25 contracts)- S&P500 Index (E-mini S&P is one of the highest traded contract in the

world)- Nasdaq100- E-mini Russell 2000 Index

What Indices are available for trading?


Why trade Stock Indices?

Key advatanges of trading Stock Indices

1. Allows you to trade on general market sentiment rather than trading individual stocks of companies

2. Is a ‘Fairer ground’ for trading• eliminates issues that plague stocks trading e.g. insider trading,

corporate scandals, accounting scams

3. Gives you exposure to opportunities in foreign markets• With more than 16 different regions for us to trade from, we can

gain access to foreign markets through each country’s stock index.


Why trade Stock Indices?

4. Hedging against your assets •Hedge your portfolio of stocks against unexpected news or uncertainty

• E.g. Fundamental of stocks is still strong but due to general market sentiment, the stock is sold down.

• In this case, you may want to short the index so that you may profit from the downside using futures contract to cover the losses from the stocks.

5. Liquidity•There is a wide range of contracts offered in over 16 global exchanges with more than 100 products available for trading.


Summary of Stock Index Trading

• Can trade in both directions (long/short)

• Can trade on the general market sentiment instead of individual stock counters

• Can trade in the stock indices of many different regions worldwide

• Trade on Margin (leverage) i.e. frees up your capital for other uses

• Can be used for hedging your stock holdings against unexpected news or uncertainty

• Longer hours of trading/more flexibility in trading hours E.g. S&P500 is almost 24 hours


MR TEO PAUL SIMONStrategist, Phillip FuturesDID: 6388 9617Email: [email protected]

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Introduction to Stock Index Futures

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