Imagine Betting Using Stocks, a Look at NSE Derivative

The Nairobi Securities Exchange (NSE) derivatives is set to launch a new market termed ‘NEXT’, that will allow you to bet using stocks after buying shares and trading them with the price movement.

The derivatives will allow you to get shares worth 1000 shillings for shares trading below 100 shillings for a single contract while those trading above 100 shillings will go at 100 shillings for the same contract. The market requires you to deposit 10 percent so as to bet for the price movement.

With the share value, you will be able to gain whenever a company’s share appreciates and lose whenever a company’s share depreciates in a period of four months.

A four-month period is a derivative contract used by the Nairobi Stocks Exchange (NSE).

Eight companies were selected by the NSE to debut this market with Safaricom among those featured. For Sh3,014 you can get Sh27,400 worth of Safaricom shares. Thus, if the shares of Safaricom appreciates, you are bound to gain and vice versa.

Other featured companies include; KenGen, KCB, Equity Bank, East African Breweries, British America Tobacco and Bamburi.

The criteria used to choose these companies was based on their daily turnover for the past six months. that is if the daily turnover of the company exceeded 7 million shillings, it traded in the NSE25 index and had a market capitalization of over Sh50 billion, then it was up for grabs.

All you will need to do is, use a little capital to buy a contract that derives its value from the real share trading at the NSE, with a promise to pay the full amount at the end of the period. Using the NSE25 index, one point represents 100 shillings.

This is an important service to both investors and speculators. Investors who have share portfolios can use derivatives to protect their investments as insurance or as a hedge. The speculators, on the other hand, can use the derivatives to predict the value of stock movement. One needs only to pay an initial margin of 10 percent of the value of the contract, and a similar additional margin plus a 0.17 percent trading fee.

The good news is that the money will be refunded when the trades close minus the fee since they are only placed to prove one will settle the final bill.

The derivatives will be officially launched on Thursday next week.