We noticed that the trading volume in Structured Warrants has been increasing in the recent years, especially among the younger group of investor. Although we say it is never too late to learn something new in life, it is best to begin investing as early as you can. Cheers to the young investors, you are on the right track and ahead of the rest! However, we understand that stock investment can be a little expensive, and we all know the struggle of saving up. Fear not, we got you covered! Warrants are great investment tools for young investors who wish to begin investing with lower capital outlay. Sounds about right to you? Well, if something is too good to be true, it probably is. So do remember to check out the risks related to trading and Warrants as well. By investing in Warrants, investors are able to capture the benefits of the Underlying shares without having to fork out a large amount of premium. This is because Warrants are priced a lot lower than Underlying shares. Check out what do we have to offer to you here.
Here comes the big question. What’s so great about Warrants? Ever heard of Effective Gearing and exposure? What are they and why are they attractive? Let’s take a look.
Effective Gearing is the main benefit of Warrants. It is the amount of financial leverage gained when you invest in Warrants. This simply means that, you get a significantly greater percentage of return by investing in Warrants as compared to ordinary shares. A 10x Effective Gearing tells us that a 1% movement in the Underlying share will result in 10% move in the Warrant price. What an advantage! As Warrants are way cheaper than ordinary shares, you will only have to pay a relatively small amount of premium to purchase them.
With a fraction of the ordinary share price, you get the exposure to the Underlying share. This can result in a significant gain during a bullish performance of an Underlying share. Next, let’s take a look at how exposure benefits investors.
Exposure enables investors to capture the benefit on the bullish view without having to purchase the Underlying shares. For investors who do not have immediate and sufficient liquidity, exposure to the Underlying shares can be achieved by the purchase of Warrants. As the Underlying share price increases, Effective Gearing enhances the profit of Warrant investors, resulting in a significantly greater percentage of return.
For example, you purchase RM 15,000 worth of Warrants with an Effective Gearing of 10X. This gives you the equivalent Underlying share exposure of RM 150,000.