On 31 August 2009 trading starts for the fifth Make a Million competition. Last year, instead of buying actual shares for their competition portfolios, entrants had to buy single stock futures (SSFs) for the first time – a slightly more complicated and riskier game.

Buying an SSF does not mean buying the share; it means buying exposure to the share price movement. Because you don’t have to deposit the full value of the shares you’re interested in, a little money can go a long way – or really burn you if the price moves in the opposite direction than you thought it would!

How does an SSF work? You normally deposit about 15% (called margin deposit) of the amount that the shares would have cost you, but enjoy full exposure to the share movement. For example, if the shares are worth R10 000 when you buy your SSF contract and the share price subsequently increases by 10% (R1 000), your 15% (R1 500) margin deposit will yield a R1 000 profit – a return of 67%. But if the share price falls by 15%, for example, you lose your entire margin deposit – a negative return of 100%. If you need more examples, have look at my previous blog on how an SSF works.

How does buying SSFs differ from building a long-term, traditional share portfolio? With an SSF account:

• You could lose more than your capital when the share price falls quite sharply. (You may want to set up a stop-loss with your position to prevent this from happening.)
• You could leverage your profits, as you need to deposit only a fraction of the value of the underlying shares.
• You are usually less concerned with the business fundamentals of a company, as you could have lost either your margin deposit or your patience long before you see the true value of the company reflected in its share price. SSFs are more suitable to share traders than long-term investors.
• It’s easier to short a share. (Shorting is selling a share that you don’t own with the idea of buying it later at a lower price and making a profit.) If you believe that the share price is going to fall, you can just instruct your broker that the SSF contract is a short position.
• You generally pay lower brokerage.

And how does playing the Make a Million competition differ from holding a normal SSF account with a broker? Well, in exchange for standing a chance to win that million, you need to put up with a few restrictions:

• You can only deposit R10 000 per competition entry, of which R9 000 is used as your margin deposit and the remaining R1 000 acts as an additional buffer which earns interest. Nothing stops you from opening several accounts, though.
• Unlike a normal SSF account, you cannot deposit extra funds into a Make a Million account. When you have lost your margin deposit due to the share price falling, you are out of the game.
• You cannot keep your position open after the last day of the competition. Before the close of trading on 13 November 2009, you need to have only cash and no more share exposure in your Make a Million account. With a normal SSF account you could continue your exposure for as long as you please and just roll the 3-month contract over from one quarter to the next.

SSFs are great instruments for those stock market players who want to gear up their capital seven-fold and don’t mind losing that capital when they make the wrong call.