In times of bear markets, the deferred settlement service (SRD) attracts the most sophisticated investors who, thanks to this device, combine short selling and leverage in order to generate potential good capital gains on the stock market. Be careful however, if it has certain assets, the SRD also includes risks that would be wrong to neglect and that it is better to know and anticipate.
Discover the operation of the deferred settlement service, the benefits that the investor can draw and the disadvantages of this device for investing in the stock market.
OPERATION OF DEFERRED SETTLEMENT SERVICE (SRD)
The SRD or deferred settlement service is a device that allows the investor to position himself on the stock market by postponing the payment or receipt of securities at the end of the trading month. The SRD, therefore, makes it possible to sell or buy shares, over a trading month, without having to pay for its securities. At the end of the trading month, if your position wins, you receive the amount corresponding to your win. On the other hand, if your position is losing, you pay the amount corresponding to your loss.
Not all securities are eligible for deferred settlement services, but most companies listed on Euronext Paris with significant capitalization and a large volume of transactions can trade on the DTH.
Euronext , at the beginning of each year, draws up a list of all the eligible securities that it updates regularly.
The SRD is made possible by the credit granted by the intermediary (the broker or the bank) that allows you to place orders in SRD. The intermediary is remunerated in the form of a commission and of course, authorizes the use of the SRD only if the investor has sufficient coverage to guarantee the payment of the securities. This hedge is limited to 20% of the amount invested in the case of shares and must reach 25% if the securities traded on the DTH are bonds. In the case of a portfolio of shares, whose value is more volatile, the coverage is even increased to 40%.
At the end of each month, on the liquidation day that occurs at the close of the fourth trading session before the end of the month, the investor with open positions at the SRD may choose to:
- Raise the position to receive cash securities;
- Postpone its position to the next month (with a deferral fee).
THE ADVANTAGES AND BENEFITS OF SRD TO INVEST WELL
There are two main benefits to using DTH. First, this device allows us to use the leverage and therefore to take a position of a much greater amount than available on his account. As we have seen above, the cover to guarantee the payment of the securities, variable according to the type of assets treated, is relatively weak. Coverage rates, therefore, correspond to leverage effects of between 2.5 and 5.
The SRD, therefore, allows a leverage effect of up to five times the amount of assets available on its account. An individual with 5,000 euros will be able to invest in shares, thanks to the SRD, up to 25,000 euros!
The SRD, if it allows taking a position with a limited initial investment, also allows generating increased profits.
Leverage multiplies its gains. Security bought with a leverage of 5 if it increases by 3% makes you realize a gain of 15%.
Then, the second major advantage of the SRD, it allows selling short. Remember that most stock market investors buy stocks they hope the price will rise to be able to achieve a great gain on resale.
But it is also possible to position on the stock market by focusing on lowering the price of a stock, by shorting an action for example. This practice involves selling a stock that is not held in the portfolio to take advantage of a downtrend in the market. In this situation, the investor takes a short position on non-held securities by betting that falling prices, he can buy them cheaper later and realize a capital gain.
SRD: THE LIMITS OF DEFERRED SETTLEMENT SERVICE TO INVEST IN STOCK MARKET
The deferred settlement service is particularly suitable for speculating on the stock market, especially during down markets and with a relatively low initial amount. But the SRD also has some risks and disadvantages that it is better to anticipate.
First, you will not be able to use the SRD via a PEA. This device can only be activated via a securities account.
Second, do not overlook the leverage risks that are particularly prevalent in the SRD. Leverage is a double-edged tool that may be favorable or unfavorable to the investor. To return to the previous example, in the case of an investment with a leverage of 5, if the security loses 3%, your investment will suffer a loss of 15%. And beware, unlike most stock market products for which the loss is limited to the amount initially invested, in the case of SRD, losses are potentially infinite. It is quite possible to lose more than the invested capital. If securities traded on the DTH with a leverage of 5 lose 20%,
Short selling combined with leverage is potentially rewarding and generates earnings during bear markets. But beware, this is a risky process and reserved for experienced traders who understand the mechanism of this device and the risks associated with it.