You Can Now Bet on Stocks as NSE Derivatives Market Begins

The Nairobi Securities Exchange (NSE) has started operating the derivatives market dubbed ‘NEXT’ that allows you to bet on stocks.

NEXT was established as a result of increased integration of the Kenyan financial markets with international markets; increased volatility in asset prices in local and international financial markets; the need for more sophisticated risk management tools and strategies; and the need to broaden and deepen Kenyan financial markets.

Regulated by the Capital Markets Authority (CMA), NEXT will facilitate the trading of futures contracts in the Kenyan market.

What are futures?

Futures are derivative financial contracts that obligate parties to transact an asset at a predetermined future date and price.

For it to be effective, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.

NEXT enables you to trade; Equity index Futures and Single Stock Futures.

READ ALSO: NSE Granted Approval to Launch Derivatives Exchange Market- NEXT

1. Equity Index Futures

NEXT Equity Index Futures are derivative instruments that give investors exposure to price movements on an underlying index. Market participants can profit from the price movements of a basket of equities without trading the individual constituents.

An index futures contract gives investors the ability to buy or sell an underlying listed financial instrument at a fixed price on a future date. These products are cash settled and easily accessible via NEXT members. The NSE shall initially construct Equity Index Futures contracts based on the NSE 25 Index.

NEXT Equity Index Futures allow investors to get some form of “insurance” for their stock portfolio by protecting portfolios from potential price declines.

 Benefits of trading NEXT Equity Index Futures:

• Price transparency and liquidity. These contracts can be sold as easily as they can be bought;
• Lower transaction fees than those incurred when buying or selling the basket of securities making up the index;
• Reduction of counter-party risk a result of trading via the exchange; and
• Centralized clearing.

2. Single Stock Futures

NEXT Single Stock Futures are derivative instruments that give investors exposure to price movements on an underlying stock. Parties agree to exchange a specified number of stocks in a company for a price agreed today (the futures price). NEXT Single Stock Futures will initially be cash settled.

Benefits of trading NEXT Single Stock Futures:

• Provide an effective and transparent hedge against unfavourable share price movements;
• They are liquid and easy to trade instruments;
• Positions in single stock futures allow investors to benefit from downwards or upwards movement of share prices; and
• Investors can have exposure to share price movements without owning the underlying share.

The markets started trading yesterday even though the official launch has been scheduled for next week.