New market will let you bet on stocks

For Sh3,014 you can get Sh27,400 worth of Safaricom shares to trade with under a new market called derivatives which will be launched on Thursday next week.

And with that much share value you will gain or lose whenever Safaricom shares appreciate or decline over four months, which is the duration of the Nairobi Securities Exchange (NSE) derivative contract.

The single-stock derivatives market requires you to deposit only 10 per cent of the value of a stock to be able to bet on the price movement.

For shares trading below Sh100, you will get 1000 shares for a single contract while for those trading above Sh100 you will get 100.

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Daily turnover

The NSE has selected Safaricom (Sh27.40), KCB (Sh38.80), KenGen (Sh5.920), Equity Bank (Sh39), East African Breweries (Sh200), British America Tobacco (Sh505) and Bamburi (Sh116.7) to debut the market.

“We chose companies whose daily turnover exceeded Sh7 million by looking at the past six months. They had to trade in the NSE25 index and had to have a market capitalisation of over Sh50 billion,” said Rufus Gitau, Business Development Manager, Derivatives.

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The NSE25 index will also be traded on the market dubbed NEXT with one point in the index representing Sh100.

The derivatives market is an interesting market where you do not need to buy shares but use 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.

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If during the period the price goes up a buyer loses on the premium, but if the price declines one makes the difference.

Derivatives can be used by investors who have share portfolios but want to protect their investment as a hedge or insurance, or by speculators who want to predict stock value movements.

One needs only to pay an initial margin of 10 per cent of the value of the contract, and a similar additional margin plus a 0.17 per cent trading fee. This money will be refunded when the trades close minus the fee since they are only placed to prove one will settle the final bill.

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