There is likely to be a major sell-off of the JSE over the next few months, says Mark Wurr, head of trading at brokerage firm Global Trader. While most of this will be foreigners taking profits in a market that ramped up more than 70% in a year, the market will settle down again once all the froth is out, providing buying opportunities later in the year. But rather than sitting back and getting hammered over the short term, there is an opportunity to make money.
To find out more about using Global Trader’s leveraged brokerage execution services to making money in a falling market, I took Wurr’s recommendation to meet one of his sales traders to look at possibly hedging my share portfolio or take advantage of a falling market.
Sales trader Nilan Morar looked at my share portfolio both from a fundamental and technical position.
The good news for me was that all my shares, FirstRand, Richmond, SABMiller, Metorex and City Lodge, look solid and are trading above key support levels.
Nevertheless, if the market comes off by 15% to 20% I will lose a great deal of my profit so far. I could simply sell all the shares in the hope of buying them back at a cheaper price, but that does not fit in with my long-term share portfolio — partly because of the costs of trading and mostly because I could be taxed on the sale of the shares, a risk I don’t want to take. I also don’t watch the market carefully enough to be confident in buying them back at the “right” price.
However, this still leaves me in a quandary about how to make some money should the JSE have a major correction. Morar recommended that I go short on the JSE all-share index (Alsi).
What this means is that you effectively sell an instrument that reflects the movement of the Alsi and buy it back later, hopefully at a lower price, thereby making money when the market goes down. Fortunately this technical stuff is handled by Global Trader. I just need to know that by going short, I make money if the market falls.
There are two ways individual investors can dabble in derivatives. Either they can trade an over-the-counter (OTC) single stock future (or spread), or they can trade a contract for difference (CFD). In both scenarios an investor does not actually own the underlying share but borrows it from Global Trader (which buys it in the market).
You are, however, exposed to the movement of the share price. The benefit is that you do not need to have loads of capital to invest. The nature of a derivative is that you are geared to the market — your profit and loss implications are identical to the traditional position in the underlying share.
One of the benefits of trading a derivative is the ability to short the market — make money when the market falls. Morar recommended that I use a CFD to short the market.
Morar said CFDs are more transparent than a future. Your profits and losses are calculated and realised daily and when you decide to close your position you know exactly how much money you have made or lost. The exchange traded fund, Satrix 40, is listed on the JSE and correlates directly to the Alsi. When you buy (or in my case sell) a CFD, you have to provide a margin to Global Trader. This basically acts as collateral. The exact margin varies between 10% and 15%, depending on the liquidity of the share. On Satrix 40 the margin is 15%. So, in order to buy exposure to 700 Satrix 40 shares (worth about R13Â 000), I had to have R1Â 989,75 in my account.
Commission starts at 50 basis points on the share price and can be negotiated downwards. Because I have effectively sold Satrix 40, for every cent that Satrix 40 falls, I make R7. Of course if the market starts to fly, for every cent it goes up, I lose R7. This loss or profit is added to or subtracted from my account daily, so if the market drops 8% in one day I can take my profits and close my position.
According to the technical charts, if the market starts to fall, it could drop to about 16Â 000 — or in Satrix 40’s case a fall from R18,50 to R16,50. If it does that I will make a R1Â 715 profit. However if the market gets a new wind, and Satrix goes past R20,50, it could continue higher, so I need to close my position quickly to limit losses. So I put in a stop loss order at R20,50.
This means if Satrix hits that price my position will automatically be closed. My loss would be in the region of R1Â 085 — but on the flip side, my share portfolio would have appreciated, offsetting my short position.
CFDs can also be used if you are very bullish on a company but don’t have the capital to gain a good foothold in the share, or you don’t want capital-gains-tax implications. It can also be very cost efficient. This trade cost me R66,40 compared with a minimum brokerage of R99 at my traditional stockbroker.
However, there are interest considerations to take into account. Because I was selling the share I actually earn interest, but if you are buying, you have to borrow it from someone at an interest rate determined by current market interest rates (about 6,5%), though you pay no monthly administration or script fees.