SSFs are leveraged investments, which mean they provide an exposure greater than your initial investment to both increases and decreases in the underlying share prices. That’s what we call gearing. It is important that investors understand that this leverage works both ways. You may lose your entire investment and more!
When buying the actual stock, the buyer has to pay the seller the full value. When buying a future, no money changes hands between buyer and seller. Instead, only an initial margin deposit is required as security for the market (priced to reflect the volatility of the underlying stock). For example: Share X is currently priced at R500; the June future is priced at R520. A buyer of the physical stock would need to pay the full R500 to the seller. However, in order to buy the future, roughly R52 must be paid as an initial margin. Should the stock rise to R530 and the future to R550, the effective returns on the stock and the futures are 6% (R30/R500) and 58% (R30/R52) respectively.
How is gearing calculated?
When you buy an SSF in the game, the initial margin is set at 30%, so gearing is 3.33 times. This means that a 1% move in a share will be a 3.33% move in the SSF.
With the warrants, the upfront cost varies from share to share and is around 3-15% for Barrier/Wave warrants (code TOP).
These are the highest geared products in the game, ranging anything from 1.1 to 10 times geared.