H. Other Stock Market Instruments
Buying shares or funds aren’t the only way of getting exposure to the stock market. Over the past few years a whole host of different stock market related investments have been introduced that give investors access to a completely different way of making money.
Some of these investments, such as Exchange Traded Funds provide cheap ways for novice investors to get access to the moves in a specific stock market index or sector. Others, such as spread betting and Contracts for Difference, can give you the ability to make money when share prices fall and, perhaps, double up your exposure to the gain in a particular share’s value.
This does, however, make some of these investments more suitable for experienced investors so you should tread carefully and make sure you understand the risks you are taking before you invest.
Exchange Traded Funds
Exchange Traded Funds (ETFs) work like index tracker funds, giving you access to the performance of specific indices. Similar to a regular index fund, an exchange-traded fund (ETF) owns a basket of stocks that mirrors the composition of a market index, such as the Dow Jones Industrial Average or the Standard & Poor's 500.
ETF shares are purchased in the same way that stock is purchased: not from a fund company, but on a stock exchange, with the help of a broker who charges a commission.
Covered warrants are a recent addition to the range of stock market related investments you can buy. These products give you the ability to profit from a fall in the value of a company’s shares, as well as a rise.
Covered warrants are a relatively new, rapidly growing market that gives investors the opportunity to gain exposure to other instruments that are not normally available on the stock market.
Covered warrants, which can be bought for as little as £50, do this by giving you the right, but not the obligation, to buy or sell a share at a specific price and at a specific time. You could, for example, take the view that a company’s share was going to fall in price over the next six months and make money if they did. This is known as ‘shorting’ a share. You are free to sell the warrants you have bought at any time through a stockbroker, just like ordinary shares.
Covered warrants, which are issued by investment banks, can be used as an insurance policy as well as for betting on share price falls. If, for example, you hold ordinary shares in a company you are hoping the shares will go up in value. But you could hedge your bets by buying a warrant that would pay out if its share price fell.
You can also use them to take bigger bets on the market. When you buy shares in a company, the amount you gain is limited to the rise in the share price: if it rises by 20%, you make 20%. But if, for example, you believe a share is set to bounce, you could buy a covered warrant that gives you ten times its gain. So, if the share were to rise 20%, your investment would rise 200%.