As someone on the vanguard of Internet investing these past 5 years there are moments that stand out: creating the first pure play Internet index in 1995; seeing future winners in Yahoo, Inktomi, DoubleClick, @Home, etc. early on; having a portfolio that ended 1998 up 312% and first quarter 1999 up 150%. But June 1 comes a milestone added to this: ISDEX Futures trading on the Kansas City Board of Trade.
The reason I recount some of these moments is to illustrate my commitment to you to empower you to make better investment decisions, to have better ways of investing in the Internet.
For the past year I and several others at internet.com have been working with the Kansas City Board of Trade on the procedures, paperwork (tons of it), and other necessary steps to bring ISDEX Futures to investors everywhere.
On the eve of ISDEX Futures trading June 1 on the Kansas City Board of Trade (kcbt.com has info), I wanted to make sure investors understood what this is and how it works, simply from an educational perspective. I am not endorsing you trade this or not. Your investments are up to you.
So in the interest of knowledge sharing, and to also introduce you to one of the good guys at KCBT who’s been hacking the deal with me these long months, let’s check in with Kansas City Board of Trade’s vice president Jeff Borchardt and get his take on what ISDEX Futures are…
1) What does futures trading allow investors to do?
Futures contracts, specifically ISDEX futures, allow an investor to protect (hedge) a portfolio of Internet stocks against a market decline without selling the actual shares of stock. ISDEX futures also allow investors to speculate on the direction of Internet stocks. Since the ISDEX is comprised of 50 stocks, an investor can speculate on the market direction of the group of 50 stocks rather than attempting to speculate on individual stocks.
2) How will ISDEX Futures Contracts be traded?
ISDEX futures will have a contract value of $100 times the futures price. The futures price corresponds to the underlying ISDEX index value. The minimum price fluctuation is .05 index points, or $5. A movement of 1.00 index points is equal to $100. Thus, for example, if the ISDEX index value is 505.12 and the futures are trading at roughly a 5.00 point premium,
or 510.00 and a person were to buy one futures contract at 510.00 and later in the day sell that contract for 511.50, that person would make a $150 profit (less commissions).
3) What are the benefits of futures trading?
a. It allows an investor to hedge their Internet stock portfolio against a market decline without selling the shares. Selling the shares would only add to the selling rush in a declining market and could also create unfavorable tax consequences.
b. ISDEX futures contracts are traded on margin which gives an investor the leverage of about $50,000 of contract value for a margin deposit of about 10% of the contract value.
c. ISDEX futures contracts are traded on the Kansas City Board of Trade, which is an organized, regulated and well-capitalized exchange that has been trading futures contracts for over 120 years.
4) What are the risks?
For a hedger, the amount of money you make or lose on a futures contract should be offset by the amount of gain or loss in the value of the Internet stock portfolio being hedged. A speculator, however, does not have the stock portfolio to offset the futures losses, and thus could lose significantly more money than the amount of margin money deposited to cover the position.
5) It seems that for many novice investors futures trading looks daunting. Would you say that futures trading is best left to market pros?
Futures trading is not for the “faint of heart.” They are positions that must be managed closely. While volatile markets offer the potential for tremendous gains, they can also cause sizeable losses.
6) When someone trades a futures contract what does that actually mean to them, what are the steps?
In order to trade futures contracts, you must first open an account with a Futures Commission Merchant (“FCM”). These are firms registered with the government to do business with the public. If in doubt, you should inquire as to whether your brokerage firm is registered to do business as an FCM. Once your account is open, the actual process of entering an order is not significantly different than trading stocks.
7) How successful has the Value Line futures been to Kansas City?
As you know, the concept of stock index trading originated at the Kansas City Board of Trade with the Value Line stock index futures contract in February 1982. If copying is the most sincere form of flattery, we have been well-flattered throughout the world. Now June 1, we offer the first stock index futures contract based on the Internet industry, the Internet
Stock Index “ISDEX” futures contract. On June 2, ISDEX options begin trading.
8) June 1 is the first day of ISDEX Futures trading (June 2 is option trading debut), what are the timelines on contracts?
We will begin on June 1, trading the June, September and December contract months. The last trading day for these contracts is the third Friday of the contract month (for the June contract month, it would be June 18). All contracts
open as of the close of trading at 3:15 p.m. Central time on the last trading day, cash settle to the ISDEX index value.
Thanks Steve! If you need anything else, let me know.
On June 1 the chairman of the Kansas City Board of Trade asked me to ring the bell to launch trading for ISDEX Futures, this new financial product…one small ring for me, one potentially giant ring for Web investing.
