EXPLAINER: How Nigeria’s newly launched exchange-traded derivatives market can profit stock investors

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The NGX has lined up seven derivative contracts for the first phase, all of which have gained the consent of the Securities and Exchange Commission.

Now that the liquidity in the Nigerian stock market is worrisomely low when set beside January’s and daily size of trade is miles apart from its pre-pandemic level, capital market authorities have launched the first exchange-traded derivatives market in West Africa, marked by Thursday’s introduction of two futures contract, NGX 30 Index and NGX Pension Index.

“You can gain exposure to the NGX Pension Index, the NGX 30 Index without necessarily, for instance, paying the full amount that you would have needed ,” Ahmed Jinad who heads investment research at broker Meristem Securities Limited told PREMIUM TIMES. “Essentially, what you’ll do with derivatives generally is to hedge risk depending on what kind of forecast you have about the market or the strength of the index and where you expect it to be at a future date,” Mr Jinad said.

It is possible to use futures to lock in gains in instances where a stock has appreciated to a point where a drop could possibly follow. Single stock futures ease both the asset and risk management process of the underlying security by concentrating on only one stock rather than a mixed bag of equities.

The NGX authority has set the third Friday of every month as the expiration date of all the seven contracts, while the Monday prior to the expiration day will be the listing day.

 

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