Stocks Of The Future - single-stock futures contracts - Brief Article

Kiplinger's Personal Finance Magazine, Sept, 2001 by Melynda Dovel Wilcox

INVESTING | Watch for a NEW PRODUCT that can safeguard your profits--or cost you plenty.

LATER THIS year individual investors will get a gander at a brand-new financial instrument: single-stock futures contracts. A joint venture between the Chicago Board Options Exchange and the Chicago Mercantile Exchange will list the new contracts; but other details, such as the exact margin requirement, tax treatment and specific stocks for which futures contracts will be available, are yet to be determined.

Currently, futures contracts on 21 large-cap U.S. stocks are traded on a London exchange. Among the well-known names: AOL Time Warner, AT&T, Cisco, ExxonMobil, GE, IBM, Intel, Merck, Microsoft, Pfizer and Wal-Mart.

Just as a hog farmer might buy a futures contract to protect against a sharp drop in pork prices, investors with a large concentration in a single stock might want a hedge to reduce risk in their portfolio.

But individual investors who don't already own the stock and want to make a speculative bet on what the price will do will discover that single-stock futures are far riskier than options, which have stricter margin requirements, or stock-index futures, which are less volatile. "For most investors who are saving to send kids to college or for retirement, speculating in single-stock futures is a dangerous strategy," says John Nestor of the Securities and Exchange Commission's office of investor education and assistance.

Mutual fund managers will welcome the opportunity to hedge company-specific risk in their portfolios without selling shares outright and potentially pushing prices lower.