F. Other Derivatives Types
A certificate, usually issued along with a bond or preferred stock, entitling the holder to buy a specific amount of securities at a specific price, usually above the current market price at the time of issuance, for an extended period, anywhere from a few years to forever. In the case that the price of the security rises to above that of the warrant's exercise price, then the investor can buy the security at the warrant's exercise price and resell it for a profit. Otherwise, the warrant will simply expire or remain unused.
Warrants have similar characteristics to that of other equity derivatives, such as options, for instance. A warrant is exercised when the holder informs the issuer their intention to purchase the shares underlying the warrant. The warrant parameters, such as exercise price, are fixed shortly after the issue of the bond. With warrants, it is important to consider the following main characteristics. A warrant's "premium" represents how much extra you have to pay for your shares when buying them through the warrant as compared to buying them in the regular way. A warrant's "gearing" is the way to ascertain how much more exposure you have to the underlying shares using the warrant as compared to the exposure you would have if you buy shares through the market. This is the date the warrant expires. If you plan on exercising the warrant you must do so before the expiration date. The more time remaining until expiry, the more time for the underlying security to appreciate, which, in turn, will increase the price of the warrant (unless it depreciates). Therefore, the expiry date is the date on which the right to exercise no longer exists. Restrictions on exercise: Like options, there are different exercise types associated with warrants such as American style (holder can exercise anytime before expiration) or European style (holder can only exercise on expiration date). Warrants are longer-dated options and are generally traded over-the-counter.
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.
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%.
As name suggests, CFD (Contracts for difference) is the agreement entered on by two parties, whereby they choose to exchange difference between opening price and closing price of the stock, mirroring the performance of the underlying stocks. (Including dividend payments and right issues) CFDs are traded on the equities (shares), FOREX, index trades, and commodities. As an OTC product, CFD’s are not standardized contracts.
-Trading on margin
-Ability to short underlying equity
-Avoiding any transaction costs, tax (e.g stamp duty)
Share CFD trading is very similar to normal share dealing in two respects. You deal at the cash price of the share, and pay a commission which is calculated as a percentage of the value of the transaction. The underlying principle in contracts for difference is that the investor does not have any claim to the underlying asset but merely takes a position based on the price movement. CFDs can also be used for hedging a position in the underlying asset by taking an opposite position in the CFD market.
CFDs also mirror any corporate actions that take place. The owner of a share CFD will receive cash dividends and participate in stock splits. CFDs are not suitable for 'buy and forget' trading or long-term positions. There is no fixed expiry date for a CFD trade, the trader closes their position when they wish to either collect their profits or cut their losses. Each day you maintain the position it costs money (if you are long), so there is a time when CFDs become expensive. For short-term trading they have advantages, provided you get the markets right. But be prepared at some economic stage to cut the position.
CFDs(all derivative instruments) are suitable for experience investors who understand the concept of gearing and the effect this can have on returns.
Long Position Example:
If the client is bullish in X Stock and expect a price increase in a week.
On Monday client buy 10,000 X shares at 1$ and sell the stock at 1.35$ in Friday.
Nominal amount: 10,000*1=10,000$
%10 Cash Deposit=10,000*10/100=1000$
Commission (0.3%) =10,000*30/10000=-30$
Financing (%5) 4 days=10,000*5/100*4/365=-5.48$
Profit-Sell at 1.35$ 10000*(1.35-1) =+3500$
Commission (0.3%) =13000*30/10000=-39$
Theoretically when you short sell a share you're lending shares to the market and therefore you should be entitled to receive interest.
Short Position Example:
If the client is bearish in X Stock and expect a price decrease in a week.
On Monday client sell 10,000 X shares at 6$ and buy the stock at 5$ in Friday.
Nominal amount: 10,000*6=60,000$
%10 Cash Deposit=10,000*10/100=600$
Commission (0.3%) =60,000*30/10000=-180$
Financing (%2) 4 days=60,000*2/100*4/365=+13.15$
Profit-Buy at 5$ 10000*(6-5) =+10000$
Commission (0.3%) =50000*30/10000=-150$