Business Maverick


JSE Investment Challenge 2021: Students up their risk game and tap into derivatives

JSE Investment Challenge 2021: Students up their risk game and tap into derivatives
The JSE precinct in Sandton, Johannesburg. (Photo: Gallo Images / Sydney Seshibedi)

As the year progresses, competition in the JSE Investment Challenge is becoming more heated as teams are knocked out from their previous positions and others take their place. This month, we take a look at some of the intricacies of investing in the speculator category, which is the riskiest category in the competition.

The teams that choose to participate in the speculator category do not have to maintain any cash component, can trade up to 10% in a company and can invest in all 331 shares listed on the JSE. Investors in this category are allowed to take on more risk and also invest via derivatives which are typically higher-risk investments (both in the challenge and when investing in real life). 

Langa Manqele, the head of equity and equities derivatives at the JSE, explains that in the real market, single stock futures would typically be used by brokers, fund managers or speculators who want to use a geared instrument to make profit from a share increasing or falling. “In a hedge fund, run by a fund manager or asset manager, for example, an instrument such as single stock futures would be used to ‘hedge’ the fund’s position to reduce the risk by making an offsetting investment or to maintain exposure in between portfolio switches,” he says. 

Trading or buying one single stock futures contract is the equivalent of buying 100 underlying shares and the contracts are traded via a broker to the JSE. This is a higher-risk investment because futures are geared products, which can magnify profits or losses. Trading single stock futures can mean making ample profits from small share price movements and on the flip side, large losses can be racked up quite quickly. 

Single stock futures offer you the opportunity to enhance the performance of your equity portfolios, protect your investments against adverse price movements and cheaply diversify risk.

Ralph Speirs, CSI officer at the JSE, says this type of risk can only typically be taken on in the university/speculator category. “We find that typically third-year or honours students use single stock futures more often as that’s when the topic of derivatives normally starts coming up in their studies,” he says. 

However, Speirs points out that as per the JSE Investment Challenge rules, university or speculator teams may not risk more than 10% in single stock futures as it keeps the risk still fairly similar to other portfolio categories where teams are required to maintain a compulsory cash balance amount. 

Manqele explains that buying a single stock future gives you exposure to greater risk at a lower upfront cost. For example, in the usual share trading environment, let’s say John has R20,000 to invest and he is convinced that the Anglo American share price is going up, so he buys 100 shares at R200 each. Two months later in August 2021, if the price goes up to R220 a share, then John’s investment of R20,000 is now worth R22,000, with a profit margin of R2,000. 

Now, if Ted had the same idea but invested via a single stock future, the transaction would look like this: Ted buys one Anglo American single stock future, which gives him exposure to 100 underlying shares but only costs him R1,500 with a reference date of August 2021. In August 2021, when the shares have increased to R220 each, Ted can cash out his single stock future. He will be refunded his initial R1,500 cost plus the difference in the value of the underlying shares, which is (R220-R200) multiplied by 100, giving him an additional R2,000. In other words, his initial R1,500 initial capital increases to R3,500, earning him a return of 133% during a period in which the share price only increased by 10%. 

“The risk with single stock futures is that the price goes against you. One of the options you have when you are not happy with the price of the futures contract is to do an early termination to unwind the trade before it reaches maturity. You can do so by entering into an equal and opposite trade,” Manqele explains. 

Competitors in the challenge can also invest in stock warrants, which give them the right to buy (via a call warrant) or sell (via a put warrant) a specific stock at a certain price level known as the strike price before the expiration date. Warrants are good for a fixed period of time, but they aren’t worth anything when they expire. However, the most you can lose from investing in a warrant is the initial price you paid for the warrant.  

May monthly winners

Competition has been fierce in the JSE Investment Challenge to date with all four of April’s winners knocked out of their spots to be replaced by new competitors. However, Mpumelelo Secondary School is still putting forward great representation with a team winning the income category for May after another team from the same school won the equity category in March and April. 

The winners announced for the month of May were: 

  • Smart Minds Traders from Mpumelelo Secondary School for the income category with income of R12,560.20
  • Goal Digger from Gansbaai Academia in the equity category with portfolio growth of 6.89%.
  • JSE Warriors from Crawford College La Lucia in the speculator category with portfolio growth of 12.22%. 
  • UZ-Rocket from University of Zululand in the speculator university category with portfolio growth of 34.33%. BM/DM

Business Maverick is supporting the JSE Investment Challenge 2021 as part of our CSI commitment. 


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