I invest in stocks and properties. But, when it comes to futures, I have to admit. My knowledge of it is pretty novice.
I did not give much thought about futures until recently. I had an opportunity to host a series of webinars on futures trading with Ms Choong Ty’ng Ty’ng, an industry veteran, author, and pro-trainer in the subject of futures trading in Malaysia.
From it, I have understood futures trading a little better and how it can be used effectively to build and protect wealth. In this article, I’ll use the FKLI to share five key reasons why you might want to start considering futures trading.
Here is a question:
What is the most efficient method to begin investing or trading shares of every 30 largest stocks listed on Bursa Malaysia?
Is it to enter the stock market and buy shares in all of these stocks? Technically speaking, you can do so if you have a huge capital to start with. Let me explain.
Today, Maybank is trading at RM 9.55 a share. You may buy a minimum of 100 shares in Maybank for RM 955. Then, we may proceed with Public Bank, CIMB, RHB, HLB, Genting, Maxis, Digi, TNB … etc. In the end, you would have made a total of 30 separate transactions to gain exposure to all 30 largest stocks listed on Bursa Malaysia.
Isn’t it a lot of hassle?
Instead, I think the FKLI which is a futures contract derived from the FTSE Bursa Malaysia KLCI is a more efficient way to gain quick exposure to the Malaysian stock market. It involves trading one contract only and thus, has effectively eliminated the need of making multiple transactions. Of course there are other way such as index funds and ETF, but this leads us to:
Let us Assume:
You opt to buy shares in all 30 largest stocks. How much does it cost to buy a minimum of 100 shares in these 30 stocks?
As stated above, you would invest RM 955 in Maybank. Subsequently, you may invest RM 2,498 in Public Bank as its stock price is RM 24.98. What about other stocks like CIMB, RHB, HLB … etc.? I do not have the exact figure. But, suffice to say, the amount is enough for you to put that as a down payment for a piece of property in Kuala Lumpur. Also, please do note that I did not include brokerage fees and stamp duties for each of these stocks.
Instead, the FKLI offers traders an opportunity to have a position in the KLCI by placing a small deposit known as margins. At the point of writing, the KLCI is trading at 1,729 index points. Hence, the contract size for the FKLI is RM 86,450 as it is calculated by multiplying the KLCI’s index points with RM 50.
Instead of RM 86,450, traders would place an initial margin of RM 4,000 to gain exposure in the KLCI. Traders get leverage as their cash upfront is just a mere fraction of the total contract size of the KLCI. So it leads us to:
#3: Bigger Returns
Let us compare:
Option 1 – You invested RM 86,450 into a stock portfolio.
Option 2 – You placed RM 4,000 to buy one contract of FKLI worth RM 86,450.
If the stock portfolio and the KLCI had appreciated by 5%,
Option 1 –
The value of your stock portfolio increased to RM 90,772.50, an addition of RM 4,322.50. Congratulations!
Option 2 –
As stated above, if the KLCI is trading at 1,729 index points and has risen to 1,815 index points, an addition of 86 index points. It is worth RM 4,300 in profit as an index point is worth RM 50. As you placed RM 4,000 to execute the trade, your total return on this trade is 107.5% (RM 4,300 / RM 4,000 x 100%) despite the KLCI increasing at a quantum of 5%.
#4: Profit from a Downturn
Let us assume:
The local stock market sentiment is terrible. You are expecting stocks to fall for the short-term. What can you do if you are a:
Stock Investor –
You can choose to sell your shares or hold onto them.
Futures Trader –
You can choose to ‘short’ or sell the FKLI to profit from its fall. Once again, the KLCI is trading at 1,729 index points today. This time, you think that it would fall to a lower level, let’s say, 1,700 index points. Here is what you can do as a futures trader:
First, you sell the FKLI at 1,729 index points. Next, if it drops to 1,700, then, you close your position by buying the FKLI at 1,700 index point. You stand to gain 29 index points or RM 1,450 from this trade. Hence, a futures contract allows traders to profit from both market directions – upwards and downwards which is unlike stocks. Thus, it leads us to:
Let us imagine:
You are an investor who manages a stock portfolio worth RM 1 million. From it, you are receiving a dividend yield of 5% or RM 50,000 in dividend income every year. If you believe that the sentiment for local stocks is terrible. As an investor, you are concerned as it may negatively impact the market value of your stock portfolio. So, what can you do?
Supposedly, you believe, the FKLI could potentially drop by 5% in the following few months and, as a result, may cause the value of your stock portfolio to fall by 5% – effectively wiping out your dividend income of RM 50,000.
Hence, you decided to short 10 contracts of the FKLI. The initial margin for one contract is RM 4,000. The KLCI is trading at 1,729 index points and true enough, it fell by 5% to 1,643 index points. It is a drop of 127 index points, and thus, you gained RM 6,350 for each contract. As you shorted 10 FKLI contracts, your total gains for these trades are RM 63,500.
In the meantime, your stock portfolio had fallen in value by 5% to RM 950,000 from RM 1 million. It lost RM 50,000 in value. Thus, you could use the gains of RM 63,500 from shorting the FKLI to offset the value fall of RM 50,000 in your stock portfolio. As such, you have ‘hedged’ or protected your portfolio from a potential fall in the stock market.
If You Wish to Start Futures Trading …
Recently, I have come to know about a trading campaign known as the ‘Back 2 The Futures’. It is organised by Kenanga Futures Sdn Bhd where it rewards both new and existing traders Petrol Cards for a number of contracts traded on both Bursa Malaysia Derivatives (BMD) and CME Group (CME) for a limited period. The details of the campaign:
If you wish to inquire about the trading features provided by Kenanga, you can click onto the link below:
In short, it is Kenanga’s vision to build a smart derivatives trading community in Malaysia and has posted a series of articles on futures. For further reading, you may click:
Link: Articles by Kenanga
This document has been prepared solely based on the writer’s own opinion and does not in any manner constitute representations and/or investment advice made by Kenanga Futures Sdn. Bhd. The views and opinions expressed herein by the writer should not be taken to mean that it has been duly authorised nor endorsed by Kenanga Futures Sdn. Bhd. Listed derivatives products are based on highly leveraged margin trading. These contracts carry a very high degree of risk and trading such instruments may expose investors to substantial losses as well as gains. The price of the products offered may fluctuate higher or lower, and under circumstances an investor may sustain total loss of their investment. As investor should make an appraisal of the risks involved in investing these products and should consult their own legal, financial, tax, accounting and other professional advisors, to ensure that any decision made is suitable with regards to the investor’s circumstances and financial positions.