FUTURES & OPTIONS – Futures and options are two types of derivatives. Their structure and the way they work are complicated, and involve leverage. They are high risk and not suitable for inexperienced investors or people who are less risk tolerant.
– Futures are financial contracts for underlying assets, such as stock, market index, currency or commodity. The underlying assets are bought or sold at an agreed price today, for a set date in the future.
Can be bought or sell with a margin deposit, only partly covers the value of the contract. Trading futures is risky as a broker can make a margin call. This means putting in more cash or securities to cover the shortfall of margin deposit if the price of the underlying asset moves against expectations.
– Options are financial contracts that give the buyer the right to buy or sell an underlying asset (stock, market index, currency or commodity) from the seller at a set price within a certain time.
Risks and returns of the option buyer and seller are different. If you are the buyer, the maximum loss is the premium you pay to the seller. If you are the seller, you get the premium. Like futures trading, the option seller faces the risk of a margin call.
STRUCTURED PRODUCTS – Structured products are complex, and embedded with derivatives, where value is based on underlying assets. Some structured products are listed on the stock exchange – derivative warrants and callable bull/bear contracts. Others are unlisted and sold by intermediaries, like banks. These include currency-linked and equity-linked investments. Many structured products are high risk and are not suitable for inexperienced investors.
LEVERAGED FOREX – Leveraged foreign exchange is a high-risk investment – You can borrow money to invest in forex, the currency market. You invest in a currency “on margin”, which means you only need to pay a certain amount – usually a small percentage of the contract amount, and you expect that the currency will rise or drop against another currency. Your profit or loss depends on the difference between the exchange rate when you open and close your contract.
LEVERAGED AND INVERSED PRODUCTS – Leveraged and inverse products (L&I Products) are derivative products traded on the stock exchange. L&I Products are structured as funds, but unlike conventional funds, they are not intended for holding longer than one day and are designed for short term trading or hedging.
Leveraged products aim to deliver a daily return equivalent to a multiple of the underlying index return e.g. two times of what the underlying index does. Inverse products aim to deliver the opposite of the daily return of the underlying index. The inverse product goes down when the underlying index moves upwards, and the inverse product goes up when the underlying index moves downwards.
Investment is a way of looking after and your family’s future needs. Such as, educational needs through college, retirement, or just to make your earnings work for you. The best way of making sure that your investment suits you well is to spend enough time in choosing the best investment portfolio. A well-planned portfolio helps you to ride out stock market ups and downs and adjust risk exposure.
Here are some options you may want to consider:
STOCKS – Is to invest in a listed company, you can buy shares and become a shareholder of the company. Stock is a share in the ownership of a company, and being a shareholder, you get dividends and the right to vote. Stocks are classified in various ways, such as industry segment, earning potential, dividend distribution or capitalization. Shareholders should keep an eye on the company’s performance, prospects and the way it is run.
FUNDS - Funds, which includes mutual funds and unit trusts, gather money from many investors to make investments. Money is pooled with other investors into stocks, bonds and similar assets. A fund manager chooses the investments and each investor owns a proportion of the total fund, according to how much money is put in. The fund invests in dozens of securities. Some funds are high risk, others are lower risk, depending on the investment goal. Investing in funds involve fees – subscription fee, annual management fee and switching fee. Always read the fund’s offering document and product key facts statement before making a decision. This gives details – investment goal, strategy, risks, fees and procedures.
BONDS – Bonds are debt instruments, or agreements to repay capital plus interest on set dates. They are issued by companies or governments (bond issuers) to raise money. As an investor, you are, in effect, lending money to a company or government. Bonds are both listed and unlisted, can be bought from the issuers during their Initial Public Offering (IPO). Some investors have bonds to earn a steady income, others profit by trading them. There are risks for investing in bonds, and the key one is credit risk. This means you depend on the bond issuer to pay interest on time, and the principal when the bond matures.
WARRANTS - A warrant is a derivative. It gives the buyer the right to buy or sell the underlying asset at a set price within a certain time. The underlying asset can be stock, market index, currency or commodity.
Some investors like warrants, as they can make big gains with a small investment; because it’s cheaper to buy warrants than investing in the underlying assets. After working out which way the price of the assets will move, you choose a suitable warrant. Do right, you will profit.
The structure, pricing and the way warrants work are complicated. The risk of investing in warrants is also high. So, it’s not suitable for inexperienced investors, or people who are less risk tolerant, such as retirees.