Bursa Building

How to choose the right warrant?

A warrant is a derivative instrument whose value is dependent on the underlying stock. Warrants offer investors leverage. Typically, with the same investment outlay, the investor would be able to buy many more times the warrants than if he had bought the underlying stock directly. There are nearly hundred of warrants listed on the Bursa Malaysia and it is common for there to be more than one warrant on each underlying stock. Before deciding on which warrant to invest in, a potential investor may consider the following pointers before taking the plunge in the universe of warrants.

  1. Know the Product
    Investors should understand the dynamics of how the product works and the associated risks before buying any investment.
  2. Have a view on the where the Market is headed
    The performance of warrants is tagged closely to the price performance of the underlying stock. An investor with a bullish view on the underlying stock would consider buying a call warrant.
  3. Determine an Investment Target
    Any investor may choose to set a deadline for the underlying asset to reach a target price. If the underlying stock fails to reach the target price, the investor should reevaluate his/her positions. Warrants are subject to time value decay and the closer a warrant is to its expiration date, the less it is worth.
  4. Select the best warrant
    Every warrant is unique – it has a unique exercise price, maturity date and effective gearing level. Investors should choose a warrant in light of his investment targets and objectives and continually be monitoring his risk/return profile.

More »

Strategy 7: Don’t Go With the Flow…Find Your Own Way

In many areas of life, once someone has achieved excellence in a chosen field, regardless of whether that person is an athlete, lawyer, musician or scholar, we fully expect that he or she will continue to excel year after year. While this assumption usually holds true when applied to people, it is actually quite inaccurate when applied to public companies.

Changing economic conditions, globalization, competitors’ emulations, regulatory changes and the array of organizational frictions that come with growth are just a handful of factors that weigh heavily on companies once they achieve excellence.

In fact, when a company delivers a stellar year for investors, the odds are increasingly stacked against it to repeat. The stock market further compounds this reality by overpricing stocks with winning records and undervaluing those with a checkered past.

The market can indeed be fickle and can become too fond of glamorous stocks that have recently yielded great profits while at the same time scorning solid companies who experience a temporary setback.

What’s an ideal stock? Well, besides measuring up to all the criteria outlined in the previous six ingredients, it would be a solid company that has fallen out of market favor and become undervalued for the wrong reasons.

Strategy 6: Conflicts of Interest are Investors’ Enemies—Avoid Them!

Most people looking to make a major purchase, such as a home or automobile, don’t base their decisions solely on the advice of the commission-based salesman. Usually, they seek outside independent advice. It’s simple common sense.
The same type of common sense applies to investing decisions. Whether it’s the fickle market commentators trying to make headlines (sometimes at the expense of providing unbiased information) or Bursa Malaysia analysts for example tailoring their recommendations to benefit valuable corporate clients, we as investors must be wary of every word we read.

Here’s why…

Every brokerage firm in existence derives much of its revenue from investment banking operations. Such is the case, public companies often seek out brokerages whose analysts give them favorable coverage. And though not every investment banker is unscrupulous, the structure of the system creates temptation—a recipe for disaster, in our opinion.

You don’t need to search very long to find investors who would agree.

Biases and inefficiencies have been witnessed time and time again, and there is no guarantee they won’t continue to burn investors.

Strategy 5: Invest With Savvy—Not Unwarranted Risk

Sometimes, in the hunt for market-beating returns, investors will take on a level of risk that leaves them awake at night staring at the ceiling. But it isn’t necessary to invest out of your comfort zone to beat the market—if you know where to look.

Savvy Means Long-Term

Far too many investors end up betting on next quarter’s earnings surprises instead of investing in the long-term growth of solid companies.

A savvy stock market investor must be prepared to give his or her chosen companies time to achieve the growth and earnings they want—there’s simply no shortcut around this.

Strategy 4: Don’t Lose Sight of the Big Picture

As individual investors, we hold our financial futures in our hands. However, the same isn’t always true for the companies we invest in. Occasionally, even a great company can be doomed if it does business in a dying industry.

Consider the typewriter industry of the early 1980s.

There were several solid companies making typewriters, but with the advent of personal computers from Apple and IBM, even the biggest heavyweights of the typewriter industry succumbed.

The lesson: as an investor you need to understand (and accept) how the bigger picture affects your investments. Not doing so can cost you dearly because the macroeconomic factors you overlook can take a big bite out of your portfolio.

The rule works the other way, too. Solid, undervalued companies who happen to be in the right industry at the right time can turn into spectacular performers.

Copyright © 2014 BursaWave.com

Terms of Service