UNDERSTANDING “volatility” can help you unlock many opportunities. At extreme levels, “volatility” brings great risk to all market participants. But try to remember, risk is related to reward. A manageable level of volatility helps people make money in the stock market. Greater and more frequent price movements create more opportunities for traders. Understanding how it works, and what instruments you can use can help make you a stronger investor.
The “Mini” Mid 70
One of the key instruments you can wield is “futures”, a kind of derivative for hedging, trading and arbitraging. The Mini FTSE Bursa Malaysia Mid 70 Index Futures – the FM70 – is a “younger brother” of the FTSE Bursa Malaysia KLCI Futures (FKLI). While the FKLI provides exposure to the top 30 stocks on the market by market capitalisation, the FM70 exposes investors to the next 70 stocks. With a lower entry cost than FKLI, FM70 is more accessible to a wider range of retail investors. Investors who have less capital now have a chance to participate and harness market volatility. Furthermore, by trading both FKLI and FM70 contracts, investors can gain exposure to all of the top 100 companies in Malaysia.
The FM70 contract value is equivalent to the index points of the FBM Mid 70 multiplied by RM2, which is the price set by Bursa Malaysia for each index point. For example, the FBM Mid 70 on Oct 9, 2019 at 12.30pm is at 13,814 points. Therefore, the FM70 contract value on Oct 9, 2019 at 12.30pm is: 13,814 x RM2 = RM27,628.
Where do I start?
To trade in the FM70, all you need is to deposit an initial margin into your futures trading account with a licensed futures broker approved by Bursa Malaysia. The initial margin for the FM70 starts at RM900. Using the example above, with RM900 you can trade one FM70 contract worth RM27,628, effectively giving you a leverage of 30.7 times. In layman terms, it means having an investment exposure of RM27,628 with an investment of just RM900.
Contracts, Leverage, Margins – How does it work for me?
A contract is simply a promise, either to buy or sell at a predetermined price and level. Let’s assume the market is at 13,814 points. You expect it to fall. You sell one FM70 contract at 13,814. Assuming the market declines, and FBM70 comes down to 13,508. You now buy back one FM70 contract at 13,508 to close out your initial sale. Based on a value of RM2 per point of movement, your gross profit is RM612 (excluding brokerage fees) using this calculation: 13,814-13,508 = 306 points x RM2. As a result, with an investment of only RM900, which is the margin requirement, you are able to generate a 68% rate of return on your investment.
In reverse, where you expect a market rally, you buy one FM70 contract at 13,814. Assuming the market goes up to 14,355 points. You now sell back one FM70 contract at 14,355 points. The difference in points is 541, and that is multiplied by RM2 giving you a profit of RM1,082 (excluding brokerage fees).
Furthermore, if you have a portfolio comprising stocks that make up the FBM Mid 70 index, you can protect these assets and reduce the risk of unfavourable price movements by hedging and arbitraging with this futures contract.
Get started, and harness it to create more opportunities.
Brokers at Affin Hwang Investment Bank report that more young investors are entering the market to trade derivatives as the FM70 contracts are more affordable, and offer more trading opportunities on a daily basis. Both the low entry cost and exposure to greater volatility offer an attractive opportunity to generate short-term returns, and more and more investors are seeking opportunities like this. You could be one of them.
Learn more about this subject by speaking to your broker or following Bursa Malaysia’s investor education programmes on www.bursamarketplace.com.
Part of a series of articles by Bursa Malaysia to educate, develop and empower everyday investors.