We now come to the last in Spiking’s series on discovering securities available at the Singapore Exchange, which began with a bird’s eye view of ADRs. This time, we’ll be taking a look at Structured Warrants, which Money Sense says are becoming increasingly popular. What warrants are, how they’re traded on the SGX, and why you would consider investing in them are among the details we’ll be discussing below.
How Warrants Work
A warrant, or structured warrant as it is called at the SGX, is a kind of investment product offered by a bank or financial institution covering a variety of assets. Examples of these assets are shares from different companies which may or may not belong to the same industry.
A warrant lets you invest in these assets at a cost that is lower than what you would pay if you invested in it directly. As OCBC puts it, you therefore gain exposure to an asset without actually owning it. If you’re following a certain stock, let’s say, and you wish to invest in it, you can buy a warrant which has it as an underlying asset.
Warrants work much like shares at the SGX in that you can buy and sell them through your broker during trading hours. You can also invest in warrants at the SGX through banks like OCBC or Maybank, and financial services companies such as Macquarie. Take note, however, that warrants come with an expiry date, and that the “active life” of a warrant is from three to six months.
Kinds of Warrants
There are two types of warrants: a call warrant and a put warrant. A call warrant is where the investor has the right, but is not required, to buy the assets covered by the warrant. A put warrant is where the investor has the right, but is also not required, to sell the warrant’s underlying assets.
The kind of warrant you invest in may reflect your own opinions of the assets it covers. If you think the price of an asset is on its way up, you might invest in a call warrant. If you think otherwise, a put warrant might be the option for you.
Why Structured Warrants?
- Stretch your investment dollar, by giving you a lot more exposure to more assets for the same amount you would spend on buying shares directly. This added exposure also increases the returns you would receive — if the price of an underlying asset goes up by a small percentage, the value of the call warrant could go up by a larger percentage.
- Protect against a drop in your portfolio’s value, in case the price of any shares you own should fall. If that happens, you can buy a put warrant which covers the shares. The drop in the underlying share prices makes the put warrant price go up. The gains from the warrant could then make up for the losses from the shares.
- Limit your losses, because the most you stand to lose is the amount you paid for the warrant, which costs less than the assets it covers. Plus, call warrants have unlimited potential gains, according to the performance of those assets.
- Give you access to other markets, enabling you to invest in foreign stocks, indices or ETFs (which Spiking has discussed in a separate part of this series). Macquarie offers warrants, for example, which track the S&P500. These warrants cover the 500 largest companies on the New York Stock Exchange and the NASDAQ.
- Enable you to have cash on hand, because in buying a call warrant instead of separate shares, you’ll have more ready capital while maintaining the same exposure to those shares.
Be Wary of Warrants…
As always, since there is no such thing as a perfect, bulletproof investment, there are risks to look out for when investing in warrants. Money Sense advises against buying warrants if you don’t understand how they work, if you can’t stand volatility, or aren’t able to keep close tabs on your investments.
Here are some of the risks involved when investing in warrants, as put forth by OCBC:
- The warrant issuer might not fulfill its obligations when the investor decides to exercise or cash settle the warrant. You would therefore do well to check out the credit risk of the bank or financial institution offering the warrant.
- The warrant might be denominated in another currency other than Singapore dollars. This means fluctuating exchange rates will affect the warrant’s value or return.
- You may not be able to sell your warrants for a reasonable price, because there aren’t enough buy orders, which affect the price of the warrants.
- Unforeseen or extraordinary circumstances may arise which hinder the warrant issuer from market-making in its warrant, or cause it to move the expiry date up. An example of such a circumstance would be if an asset covered by the warrant de-lists. You would therefore do well to read the terms and conditions of the warrant carefully before investing.
Money Sense also points out that investors ought to remember that warrants are susceptible to the slightest changes — if the price of an asset covered by a warrant changes even by a little, it could cause the price of the whole warrant to change by a lot. Investors must also remember that a warrant’s value goes down as time passes and becomes completely worthless after its expiry date.
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