Stock warrants are issued with a debt instrument that allows an investor to buy stock a later date for a higher price.
What is a structured warrant?
A structured warrant is issued by a third party financial institution, on the shares of an unrelated company, a basket of companies’ shares or an index.
To understand what a structured warrant really is, let’s compare the characteristics of a company warrant and a structured warrant.
You have probably heard the phrase “warrants are very sexy instruments”.
When the market is hot, speculators and traders chase after the warrants driving its prices up.
Conversely, when the market declined, many still hold on to their warrants until it become worthless.
It is the lack of understanding warrants, especially Structured Warrants, that cause many investors to lose money.
Stocks & Mutual Fund Investments : What Are Stock Warrants?
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1. Why and Who Should Trade Warrants?
2. Common Misconceptions About Structured Warrants
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4. Golden Rules for Trading Structured Warrants
5. Case Study.
Detail of Event
Date: Saturday, 5 December 2009
Time: 9.00 am to 11.30 am
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Speaker: Speaker from NagaWarrants
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Structured warrant market drawing attention
PETALING JAYA: The structured warrant market in Malaysia, which has huge potential for growth, has attracted a lot of attention lately.
Kenanga Investment Bank Bhd head of equity derivatives and structured products Seow Choong Liang said call warrants had seen more activity of late.
“As the structured warrant market tracks sentiment of the underlying asset, call warrants listed on Bursa Malaysia have seen increased activity along with the current overall bullish stock markets,” he said.
The Securities Commission and Bursa Malaysia recently revised the regulations for the issuance and listing of structured warrants. The new guidelines, which allow put warrants to be issued in addition to call warrants, took effect last month.
AmInvestment Bank Bhd director and head of equity derivatives group Ng Ee Fang said investors were not so sensitive to changes in guidelines or regulations, but the issuers had been quick to respond.
“For instance, we launched Malaysia’s first put warrant (on Hong Kong exchanges and clearing) in the same week that the change in regulations allowed us to do so.
“We and the other issuers have also been quick to issue via direct listing, which gives us more flexibility than the traditional placement method,” she said, adding that there was greater interest in a structured warrant when its underlying stock or asset was actively traded.
OSK Investment Bank Bhd head/director of derivatives and structured products Foo Keah Keat said some of its structured warrants issued via direct listing had “enjoyed good trading volume” after listing.
“I think investors have either accepted this new offering method, or they have no problem with it. More important is our selection of the underlying stocks and market timing,” he said, adding that interest in the existing four exchange-traded funds (ETFs) call warrants had so far been poor.
Foo thought that the ETF concept was “a little more difficult to understand” and it could also be that they (investors) were less familiar with the underlying ETFs, which were all foreign.
“We have seen a significant decline in interest in foreign structured warrants during the last six months. Hence, the reason may not be ETFs per se but the lack of interest in foreign structure warrants in general.
“I think the jury is still out on put warrants. The lukewarm interest could be due to the current ‘more bullish’ market sentiments and lack of understanding. More investor education on this new product is needed,” he said.
Commenting on the trading of structured warrants, Foo said OSK saw active trading in some counters every now and then when there had been a sharp movement in the underlying share price.
“This showed that there are investors monitoring and trading the structured warrants on a regular basis. Our goal is to convince more investors to recognise the benefits of structured warrants as effective trading (investment) instruments and actively trade in them,” he said.
Seow agreed that trading in structured warrants had gained some momentum. He said the trading had been on an uptrend since the second quarter of this year.
The reduction of the tick size on traded securities had been a disadvantage to traders, he added.
“For example, if a trader in the past were to buy 1,000 Maybank shares at RM6.42, the total transaction cost after paying transaction fee is RM96.68 (assuming the minimum brokerage fee of RM40, 0.1% for stamp duty, 0.03% on clearing fee and multiplied by two for buying and selling).
“In this transaction, investors would only need two tick moves (five sen per tick) upward to break even. However, due to the change in tick size to one sen, the investor will need 10 tick moves to break even,” Seow said.
As traders looked at warrants as proxies to the underlying, and if the tick size on the underlying had come down significantly while that of the warrant issued had not changed (most of the warrants today still fall within the 0.05 sen tick size), he said the trader then might not be as inclined as before to trade in warrants as they would be seen as not tradable (not much price movement).
Meanwhile, Ng said AmInvestment had two warrant programmes. Its regular warrant programme is targeted at sophisticated investors who want to take leveraged positions on stocks or indices.
“Second, a low strike warrant programme which is targeted at long-term investors who want greater access and growth over the medium term. The previous issue was the 100 million Berkshire B Zero Strikes at RM1 each,” she added.
On return of any warrant, Ng said it would depend on the performance of the underlying stock or asset.
“For instance, if the underlying stock rallies, a call warrant on the stock will rally, while a put warrant price will fall. Also, when the underlying stock rallies, an out-of-the-money call will rise faster in percentage terms (because of the inherent leverage) than a deeply in-the-money call,” she explained.
Foo said the structured warrants offered a “play on market volatility.” “Structured warrants are for active and slightly more sophisticated traders as well as institutional investors, and for the more experienced and sophisticated retail investors.”
He said structured warrants could be considered a “high-risk high-return instrument” if used for leveraging purposes. On the other hand, structured warrants could be viewed as offering lower risk if used for a limited downside strategy, he added.
Structured warrants make strong debut
PETALING JAYA: Investors showed a healthy appetite for the 10 structured warrants that made their debut yesterday on Bursa Malaysia, taking up 76 million units, or 7%, of the total volume traded.
Among them, Axiata-CC was the most actively traded in tandem with its underlying shares, Axiata Group Bhd.
Axiata-CC rose more than 20% to 18.5 sen from its offer price of 15 sen each while Axiata shares gained 13 sen, or 4%, to RM3.06 per share.
Gamuda-CI gained over 20% to 26.5 sen from its issue price of 22 sen. Gamuda Bhd, meanwhile, closed unchanged at RM3.34.
HKEX-H1, issued by AmInvestment Bank Bhd, is the first put warrant to be issued on Bursa. The underlying stock for the put warrants is the Hong Kong Exchanges and Clearing Ltd (HKEX).
AmInvestment also issued the call warrants on HKEX, as the pair of call and put would allow investors to take a position on the potential upsides or downsides of HKEX.
The other warrants listed yesterday were based on local stocks that have large capitalisations.
A head of research of a local brokerage said investors were likely riding on the underlying stock since entry via the structured warrants was cheaper than buying into the actual shares.
He cautioned, however, that investors might “get themselves caught” if they’re not fully aware of the mechanism of such products.
Investors might have to be satisfied with a smaller profit as the gains in structured warrants were unlikely to be of the same proportion as the underlying shares, he added.
An institutional dealer with a foreign house said interest on structured warrants was subject to market conditions and the performance of the underlying stock.
“Retail investors still need more exposure to trading in such instrument as some are not familiar with the nature of structured warrants,” he said.
Another dealer concurred, saying “retail investors are unsure of how to trade in structured warrants”, which was why trading volume remained moderate to thin for such instrument.
“Institutional and sophisticated investors are mostly the ones trading in these (warrants),” he added.