The purchase of a future issued on a share is an alternative to buying the share. The price exposure is the same, but futures trading requires less capital, and an investor can therefore trade amounts that are generally 5 to 10 times larger than regular share trades.
The sale of a future is an alternative to selling the share. Futures enable the investor to sell a share without having to own it first, a practise referred to as ‘going short in the market’.
The advantages of futures are therefore that the investor may:
gear his investment
speculate in movements in market prices or hedge against price exposure in a simple and expedient way
go short in the market
make an investment that tracks the entire market through one single transaction
Futures thus enable the investor to speculate in both price increases and price falls. Speculation may be based on general market movements in the index future, or specific shares via futures on the individual share. If the investor wishes to limit the exposure on one of his share portfolios, he may also use a future. If he believes that his share portfolio is right but still fears general price falls, he may hold on to his shares and sell out index futures. Similarly, an investor may sell futures on single shares if he expects price drops while buying or holding on to shares which he finds will move upwards.
