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One thing we’ve learned from answering how our traders make money when the market has had a bad week is that a little bit of knowledge is a bad thing.
September 15, 2021
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Derivatives is a world of investment that most people neither know, nor understand. We are often asked how our traders make money when the market has had a bad, or even just a slow week. One thing we’ve learned from answering this, is that a little bit of knowledge is a bad thing. So, let’s have a slightly deeper dive into the world of financial derivatives.
The fact is, our traders don’t just buy stocks and hope they go up. This is what Investment Managers/Wealth Managers do. It’s all they are allowed to do really. Most of them actually know very little about financial derivatives and nor do they need to as they can’t invest in them on your behalf. We have spoken to IFA’s who had never even heard of futures and options.
Don’t worry if you haven’t either, that is the point. Having never heard of them, and now only being exposed to them on The Portfolio Platform, you are seeing how they are supposed to be traded. They are financial tools available to professionals to increase speculative returns. Those who have heard of them, but don’t understand them, are in the worse position, of ‘knowing a little’.
Stock picking, is a time-consuming business for research analysts. Their job is to find stocks that will outperform the market. This is much harder than it sounds. Who is to say what will cause the next collapse? Entertainment and travel lost out this time round, last time it was banks and financials. There is an element of luck in it, and as Warren Buffett has always said, you’re probably better off buying the index as a whole.
On top of the time consumption, and the difficulty of predicting specific issues of the future, most wealth managers are restricted to ‘long only’ portfolios. This means they can only make money when the value of the stock goes up, which is essentially only exposing your portfolio to 50% of opportunities.
Due to these restrictions imposed on them, they spend a fortune on research, to find the best blend of stocks. If the equity Index increases by 7% in a year, they need to have a range of stocks that increased, on average, by at least 10%. If they don’t, why bother with the research at all, they might as well just do as Buffett suggests, and buy the index.
When we say, ‘buy the index’, we are now moving closer to the conversation of what an equity derivative is, and how it can be beneficial to your portfolio.
The FTSE 100 itself, has a value. It is calculated using the total market capitalization of the constituent companies and the index value. The market cap changes with individual share prices of the indexed companies throughout the trading day, so the index value, changes with it. It is calculated continuously based off the cash market, which is open between 8.00am and 4.30pm.
However, at 4.30pm, although the cash market (stock exchange) closes, the valuation of the index still moves as other global markets are open, and after-hours trades are placed around the world. This can also be done via the trading of FTSE futures, and a Future, is a derivative.
First of all, let’s momentarily ignore exactly what the FTSE is and just think of it in terms of a number that can go both up, and down. If we say that number is 7,000 (which it pretty much is), then in any given day, this number can move in either direction.
Do you think over the next week this number will be more, or less than 7,000? If you think it will be worth more, then you would buy the FTSE at 7,000; if you think less, you would sell the FTSE at 7,000.
In essence, it is that simple, in practice, it’s significantly more complicated, but as an investor on The Portfolio Platform, that is really all you would need to know about the position. If one of our traders is ‘short’ (meaning they sold) the FTSE at 7,000, then you make money when this number goes down, if they are ‘long’ (meaning they bought), then you make money when this number goes up.
1 FTSE future has a tick increment size of £10. This means that if the FTSE 100 goes from 7000 to 7100, and you are long (bought), then you make 100 ticks, with a value of £10 per tick, which equals a profit of £1,000.
The same principle goes for all global indices, they just have differing tick sizes.
Let’s say for the sake of simplicity that we have £10,000 to invest. If you buy £10,000 of a stock and that stock goes up 10% on the year, you’ll make £1000. That’s pretty simple. That is also all your Wealth Manager can and will do so they are limited on the amount they can make, to the % amount that a cash stock will move.
If our traders wait for the right moment to buy a FTSE future instead of picking stock, and the market index moves 10%, 7000 becomes 7700. This is 700 ticks so our traders make both themselves, and you, £7000.
The biggest difference of all, comes when our traders are short, so having sold the FTSE at 7000. If your Investment Manager holds the stock and it falls 10%, then your portfolio will lose £1,000 rather than gain £1,000. This happens. They will say that the market dropped, and therefore so did the value of your holdings, and you will accept it.
However, if one of our traders is short, as we saw last week, and the market drops 10% to 6300, they will make 700 ticks, and therefore still make £7000. Where your cash portfolio (which they all are) lost £1,000, your portfolio on The Portfolio Platform, would have made £7,000.
This is how trading FTSE 100 futures works and it why the numbers on our platform, are so significantly different to standard, old fashioned wealth management.
The problem then comes, when people know a little. Users of our platform have said to us on many occasions, that they have recommended us to friends, but a few are stuck in the mindset that these kinds of returns just aren’t possible.
Well, they are and they have been for decades.
Financial derivatives are a very specialist market place, and have been around for decades. However, until now, their exposure has been limited to, and only available to, professional traders.
Investment banks and hedge funds have been posting their biggest profits in history over the last year. The reason for this? Because they can also trade derivatives, and like us, they know what they are doing. Unless you are talking to a derivatives trader, it’s like speaking to someone in another language.
The closest an Asset/Wealth/Investment manager is likely to come to trading a derivative, would be to put some of their own portfolio, into a hedge fund. They do this, because hedge funds can make money when the market moves in any direction, and they can leverage a position on margin. Does this sound familiar? It certainly should.
No doubt the very same people who might say what we do is ‘too good to be true’, will also be in awe of how hedge funds can make such big returns. We can tell you how they make big returns, they trade derivatives. They use margin to take larger positions, and are able to be both long and short the market.
Our performances are live on our website. They cannot be faked as all trades are run through our own software to provide the correct fill price for every single trade made.
What hedge funds have been doing for years, you can now do simply by linking your broker account to our professional traders, and autotrading them.
This is new technology that now enables retail investors such as yourselves, to connect via our software to world class derivatives traders. If they place a trade on their own account, our software will send a signal to your broker account, and you will place the very same trade. You don’t have to lift a finger; the whole process is fully automated.
Just like our own traders, your account can trade on both the long and short side of the market. You can take leveraged positions and reap the reward. In 2020, our traders averaged a return on investment of 58.8%, and 2021 is so far looking even better.
It’s the world of financial technology that has made this possible. 30 years ago, all derivatives trading happened in what was know as a ‘pit’, and it looked like this:
All of the people in this picture, are either trading, or broking derivatives. Most others in the city knew they were all making a lot of money, but very few really understood how.
By the start of the new millennium, most of the pits in London had closed down and trading was transferred to electronic screens. Trading pits, then became trading floors in skyscrapers.
Derivatives traders were, and still are, surrounded by screens, but ultimately, doing the same job. Now, due to our innovative software, our traders can place the same trades, at the same time, in your account without you lifting a finger.
Browse our selection of traders, and trading teams, on our website here. You can add as many as you like to add extra diversification to your portfolio. The results you see are exactly what you would have made, if you had linked to that team, with the same amount of money shown on their own account.
Our team are always on hand to answer any questions you have about building your portfolio, then, once it’s set up, you leave it. You never have to touch it again.
Your portfolio will now automatically trade itself, matching all the trades placed by your chosen trading teams.
All of our traders are chosen by our trader selection committee, which comprises derivatives traders with decades of experience. We have asked the best, to choose the best and we think you’ll agree, judging on performance so far, they have succeeded.
If you would like more information, please do not hesitate to contact us and one of our traders or directors will be in touch to discuss a bespoke portfolio that is best suited to you. You are the investor, it’s your capital, shouldn’t you have a say in what happens to it?
Join one of the fastest growing areas of financial technology and register at The Portfolio Platform.
If you wish to book a call and speak to a member of the strategy selection committee, please click here.
“TPP might just be about to revolutionise investment for the retail market.”
- London Stock Exchange 2020
