How well do investors understand CFD risks?

Business Times - 22 Jul 2010
By R SIVANITHY

ANECDOTAL evidence suggests that the market for contracts for differences (CFDs) has grown strongly over the past few years and shows no signs of slowing down. No one knows just how big the local market is, since these instruments are traded over the counter (OTC).

But thanks to aggressive advertising and marketing by the big CFD players, an increasing number of retail investors are known to be trying their luck in the CFD arena, probably also encouraged by the fact that several local brokers have also jumped on the CFD bandwagon.

This is fine - the more financial instruments there are available to the investing public, the better. But CFDs are highly complex instruments with plenty of inherent risk.

With a currency CFD for example, it is possible to enjoy 100 times leverage, an attractively high number if the market moves in the investor's favour. But what is sometimes forgotten in sales pitches is that the knife cuts both ways.

So you have to wonder: Are retail players fully informed of all the risks? Or is the financial industry's approach the same as it was on the sale of the failed structured products such as Lehman Minibonds - that is, to focus almost exclusively on high potential returns and downplay the high risks?

You also have to ask, for example, why it is that CFDs are not allowed to be sold to retail investors in the US. And why it is that in the UK, retail investors have to take a suitability test before being allowed to trade CFDs?

Australia has, until now, had no major restrictions on CFDs. But last week, the Australian Securities and Investments Commission (ASIC) - the country's corporate regulator - said that it was looking to clamp down on the CFD industry because of widespread ignorance of the risks.

Ignorant of dangers
The Australian Financial Review, in its July 12 edition, quoted ASIC commissioner Greg Medcraft as saying: 'People just don't understand how dangerous (CFDs) are. There is a real lack of understanding about the impact of leveraging and how it can devastate them.

It's actually riskier than going to the bookies, because with bookies, if you put down $10,000 you only lose $10,000. Here, you put down $10,000 and you've lost your house and whole life savings.'

In the course of its investigations into the Aussie CFD market - estimated to be A$350 million last year but thought to be much larger today - ASIC found that investors were not only ignorant of the risks involved, but also were not being warned by those selling CFDs because the sellers themselves did not fully understand the risks.

It was also reported that two market makers or providers - CMC Markets and IG Markets - control around 70 per cent of the market.

Should the Monetary Authority of Singapore conduct a similar survey here to see if the burgeoning number of investors in CFDs really know what they are buying into? The answer, judging by the experience Down Under, is why not?

Questions to ask
If there was to be such a review - apart from the obvious questions about understanding how leverage works - investors should be asked if they understand the exact nature of the product. For instance, that when they take a CFD position, it is the market maker who is on the opposite side of the trade, which means the playing field is slightly tilted in favour of the market maker because it knows what its customers' positions are and can hedge itself accordingly - usually in the underlying cash market.

The investor has no such knowledge. Nor does he know what positions the house has taken, so even though some people may think this is insignificant, there is nevertheless asymmetric information in a CFD trade.

Similarly, do investors realise that unlike margin loans, CFD positions are not closed - or force-sold - when the market moves against them, which in theory could mean potentially large losses if the position is not constantly monitored and/or if no stop-loss is implemented?

Additionally, do investors realise that holders of CFDs on stocks are not entitled to dividends, because CFDs are not shares? Do they know that unless they have some form of deposit insurance, there is a chance - albeit small - that they could lose all their money if the market maker goes bust?

Also worth asking is if whether the deposit money collected from opening a CFD account is placed into a pooled segregated account and if so, how this money is to be used if very large customers incur big losses and cannot pay up?

As stated earlier, this is not to say that CFDs are unsuitable investments for retail players. But clearly, these instruments, given their risky nature, are not suitable for everyone. Going by the experience of other developed markets - the latest being Australia - it is worthwhile for local regulators to check if there is adequate disclosure in the marketing of CFDs here.

Copyright@2010 Singapore Press Holdings Ltd. All rights reserved.

Riding risks with stock warrants

The average monthly turnover for warrants in the first half of this year has rallied to a relatively healthy $482 million.

Tue, Jul 20, 2010
my paper

BY REICO WONG

THE warrants market in Singapore is seeing a pickup in activity, as investor interest in these high-risk, high-return investment options rebounds in line with the global economy recovery.

According to data provided by Societe Generale (SG), a major issuer of warrants in Singapore, the average monthly turnover for warrants in the first half of this year has rallied to a relatively healthy $482 million.

Experts added that the current 1.5 per cent ratio of warrants to overall market turnover - while still low compared to those during periods of economic boom - indicates that investor confidence is slowly improving.

There has also been a strong return in demand specifically for stock warrants in the past six months, according to Mr Barnaby Matthews, the head of derivatives at Macquarie Capital Securities. "It is normal during times of high uncertainty and volatility for investors to favour index warrants - which was the case for most of last year," he said.

"Now that confidence is returning to the market, investors have become more active in single-stock warrants, which have contributed almost 40 per cent to warrants turnover in each of the last two months."

He added that the size of outstanding positions in warrants that investors are holding onto is growing.

"This shows that investors are taking on more risk and are confident enough to hold positions," said Mr Matthews.

Experts pointed out that investors are typically drawn to warrants because the instruments allow them to gain exposure to an underlying security without actually owning it. Also, investors can easily trade the highly liquid warrants on the Singapore Exchange, just as they can for shares.

More importantly, warrants cost only a fraction of the price of their underlying security. Investors are thus able to trade more warrants than the underlying shares for the same outlay in investment.

Because the unit prices of warrants are low, they offer a high level of gearing to investors. Warrants generally exaggerate share-price movements in terms of percentage change.

For example, if share ABC rises by $0.30 per share, from $1.70 to $2, the percentage gain would be about 18 per cent.

But a $0.30 gain in a warrant, from $0.70 to $1, would translate into a 43 per cent gain.

The gearing factor here would therefore be 2.43 (calculated by dividing the original share price by the original warrant price after multiplying it by the share conversion ratio). This figure also indicates the amount of financial leverage the warrant offers.

The higher the gearing factor, the larger the potential for capital gain. This works to the investor's advantage, especially if his outlook for the underlying share is very bullish.

However, investors must note that gearing is a double-edged sword. The 43 per cent gain shown in the earlier example could just as easily become a loss and cause substantial damage to a portfolio.

"Selecting warrants with an appropriate gearing level and deciding how much of their portfolio to invest in warrants are two key areas that Singaporean investors could improve on," said Mr Matthews.

Investors also need to look beyond gearing if they are not trading warrants in just the short term, said Mr Edmond Lee, director of Global Equity Flow at SG Securities.

"If you target a longer uptrend or downtrend, gearing cannot be used as a reference because it doesn't take into account implied-volatility changes and time-decay factors," he said.

Implied volatility - the expected volatility of the underlying share in a given future period of time - is a critical factor to consider when selecting a warrant, as it is related positively to the warrant price.

Usually, the higher the implied volatility, the higher the value of the warrant, so it is generally recommended that investors pick warrants with lower implied volatility.

Also, unlike shares, warrants are decaying assets. Investors have limited time to exercise their rights on the warrants, before they expire and become worthless.

Ultimately, investors need a complete understanding of all parameters affecting the performance of warrants before they start trading such instruments.

Up-to-date and reliable information about markets and the underlying shares is also important.

Mr Matthews added that it is critical for investors to set "stop loss" and "take profit" price targets, just as they would for other investments.

"If you are disciplined when investing with warrants, your chances of success will increase exponentially," he said.

WHAT ARE WARRANTS?

IN FINANCIAL circles, warrants are an investment opportunity which typically arise as part of a new bond issue, but are traded separately from the mother stock.

Considered a security, warrants allow investors to bet on the value of the issuing firm's shares, whether it will rise above or fall below the prevailing market price, at a specified future date.

The price of a warrant thus reflects the value of the underlying stock but are more volatile.

Investors should note that warrants come with an expiry date. The more time remaining before the warrant expires, the more time for the price of the underlying stock to appreciate, which, in turn, will increase the price of the warrant (unless other factors cause it to depreciate).

TYPES OF WARRANTS:

Warrants typically fall into two main categories: American-style warrants, which allow investors to exercise their right at any time during the life of the warrant; and European-style warrants, where the rights can be exercised only on the expiry date itself.

Most warrants in Singapore are European-styled.

Within the warrant market, call warrants represent a specific number of stocks that can be purchased from the issuer at a specific price, on or before a certain date. Investors will buy this if they believe the underlying stock price will rise.

On the other hand, a put warrant represents a certain number of shares that can be sold back to the issuer at a specified price, on or before a stated date. Investors will buy such warrants when they believe the price of the underlying stock will fall.

For a call warrant, when the underlying asset price is higher than the warrant strike price, it is in-themoney - intrinsic value is greater than 0.

If the underlying price is equal to the strike price, it is at-the-money. If the underlying price is lower than the strike price, it is out-of-the-money - no intrinsic value.

For a put warrant, when the underlying asset price is lower than the warrant strike price, it is in-the-money - intrinsic value is greater than 0.

If the underlying price is equal to the strike price, it is at-the-money. If the underlying price is lower than the strike price, it is out-of-the-money - no intrinsic value.

INTERPRETING THE WARRANT

NAME: STI 2450 DBePW081201

Underlying asset: STI

Strike Price: 2450

Issuer: Deutsche Bank

Warrant Type: e (European type)

Warrant Class: PW (put warrant), CW (call warrant)

Expiry date: 081201 (Dec 1, 2008)

曹Sir语录

曹仁超，1967年5000元入市炒股，现今身家近2亿元，被誉为“香港股神”。曹Sir还是香港最资深的财经专栏作家之一，40余年笔耕不辍，每周一在《信报》撰写《投资者日记》专栏，以轻松有趣的笔触，分析中美港及环球股市以至政经形势。

1 曹Sir语录：一个人成功与否，七成在于其人际网络。
2 曹Sir语录：一个国家的经济前景，很多时候都与其民族性格有关。
3 曹Sir语录：一生人投资是成是败，主要取决于性格。除了不怕输以外，还要订立目标，戒除坏习惯，再配合7C理论，才可以用一生有限的时间去赚取无限财富。
4 曹Sir语录：上大学的真正目的，也是建立人际关系，同窗间相互帮助、互相鼓励，然后齐齐上位。
5 曹Sir语录：不怕失去机会，只要有资本，明天又有另一个机会。
6 曹Sir语录：与较自己高一点层次的人建立友谊，在社会阶梯上便可一步一步往上走，与好友齐齐上。
7 曹Sir语录：中国需要进口的东西，未来价格皆看好；中国可以出口的东西，未来价格皆看淡。
8 曹Sir语录：买入后股价如跌10％，必须检讨自己？投资策略系咪出错；如损失扩大到15％，便不理三七廿一沽之哉！
9 曹Sir语录：了解群众心理亦十分有用, 因群众常常睇错市。
10 曹Sir语录：人一定会犯错，但不可让小错变成大错。
11 曹Sir语录：人与人之间其实99%是一样的，唯一的分别就是『性格』。这种『守株待兔』精神，不是维持一天，一个月甚至一年，而是一生一世。
12 曹Sir语录：作为精明的投资者，我们首要捕捉大趋势，即所谓的有智慧不如趁势。
13 曹Sir语录：储蓄这习惯，最迟于二十五岁便应该结束。节流不如开源，接下来应学习投资理财，并将之视作一生一世的事。否则，保证你退休之时，生活一塌糊涂。
14 曹Sir语录：决定借钱给朋友，便不要奢望有归还之日，更须有失去这个朋友的心理准备。
15 曹Sir语录：千变万变最后离不开真实，就是P/E8到12倍是偏低、12倍到18倍合理、18倍到22倍偏高，一旦超过22倍，便必须企业纯利保持高增长。
16 曹Sir语录：升市将尽小心「单日转向」或「单周转向」走势 , 通常几有用。最简单的技术分析最有用 , 太复杂的技术分析只系用黎吓初学者。
17 曹Sir语录：博反弹系极之专业的行为。如你并非投资专家，便不应加入博反弹行列。
18 曹Sir语录：只有酒楼侍应才问客人的贴士，如你投资时仍信贴士，你已经失败。
19 曹Sir语录：可以改变你一生命运的是二线股（明日的蓝筹股），不是今天的蓝筹股，策略是“狠、忍、准”，一旦看得准，便要忍，一如鲨鱼（死咬住不放）般狠！
20 曹Sir语录：唔做功课？投资者最终一定蚀本离场。
21 曹Sir语录：唔好将失败的投机转为投资，不然只会损失更多！
22 曹Sir语录：在困难的日子里，不要对自己失去信心；在疯狂的时候，应时刻保持头脑冷静。
23 曹Sir语录：在熊市中，投资者最多只能动用30%资金入市，70%应保留现金。
24 曹Sir语录：在经济放缓期间，二线股表现通常较逊色，皆因其Beta系数甚高，即升幅或跌幅都高于大市。
25 曹Sir语录：大部分投资者失败的理由，并非错在Timing或方向，而是犯下太迟才参加Party的毛病。他们不是死于过分保守，而是死于过分进取。
26 曹Sir语录：天下战国，五胜者祸，四胜者弊。三胜者霸，二胜者王，一胜者帝。是以数胜得天下者稀，以亡者众。
27 曹Sir语录：女性对理财知识的需要较男性更大，因为在家靠父、出嫁从夫、老来从子的日子已一去不返。
28 曹Sir语录：如你带墨镜看世界，整个世界永远都是灰色，何时何年何日都不会有前途；如你带粉色眼镜看世界，世界时刻都美丽。
29 曹Sir语录：学晓一种投资技巧，基本工夫需要一百小时；但掌握一种投资技巧，约需一千小时；至于达到出生入化的境界，非一万小时不可。
30 曹Sir语录：常常听人说，金钱不能买来快乐。这只是安慰那些没有钱的人。贫贱夫妻百事哀，普通人所遇到的烦恼九成与钱银有关，开门七件事都可用金钱解决。
31 曹Sir语录：年轻人请及早决定与谁做好朋友，皆因大部分长存的友谊都发生在三十岁之前。朋友越老越好，新知总不及旧雨般可以毫无芥蒂地说真心话。
32 曹Sir语录：年轻人选择什么职业、选择什么朋友，两者俱可影响一生。
33 曹Sir语录：年轻时资金少、智慧不多，只有勇气多，因此要博；年纪大了、资金多了、智慧多了，反而勇气少了，因此要稳，因为已经输不起。
34 曹Sir语录：并非命运决定一切，而是性格决定一切，包括决定你的投资方法和策略
35 曹Sir语录：当富豪们花一亿几千万元购入所谓现代艺术品之时，通常也是股票市场见顶日子。
36 曹Sir语录：必须学习阅读上市公司年报，从一个小股东的角度去了解上市公司的情况；甚至把自己当成公司老板，从这个角度去决定到底应买入、持有或沽出？
37 曹Sir语录：怕失败的人永远成功无望、注定平庸一生。不幸地，社会上99%的人皆如此，只有1%人能从失败中学习。
38 曹Sir语录：成功人士知道自己的强项和弱项，所以大家永远不会见到曹仁超唱歌。大部分学者所犯的错误，就是讲就无敌，做就无力。
39 曹Sir语录：成功的投资者，无须在市场上百战百胜，而是遵守一个投资计划，信奉一套理念和系统，严守纪律，并戒除贪念与恐惧
40 曹Sir语录：成功的投资者，要性格谦虚、充满好奇心、思考独立、知所进退，并能时时保持平常心。
41 曹Sir语录：成功的投资者心态，赢钱时不怕去到尽，一旦输钱就自动缩手。
42 曹Sir语录：成功的老板必须具备领袖的性格，为人刚正不阿，所有决定背后都有实质因素的支持。
43 曹Sir语录：成功者所以成功，是因为不怕失败！失败者所以失败，是失败后不再尝试！
44 曹Sir语录：我们为生存而努力，生命的意义不在于你得到多少，而是你可以给予别人多少、在整个过程中你是否活得精彩？
45 曹Sir语录：我老曹1968年年底入行至今快三十九年矣，请问股市几时有“理性”过？股价从来不是偏高就是偏低，往往在吹泡沫和泡沫破灭之间来回摆动。
46 曹Sir语录：我老曹一早已发现财富获得不是来自辛勤工作，而是来自聪明投资策略。
47 曹Sir语录：我老曹的止损位一般定于高位回落15%的水平；至于赚钱获利，则最少要求投入资金的升幅达100%。
48 曹Sir语录：我自觉优于一般分析员，皆因我清楚自己的无知，同时肯承认自己无知。
49 曹Sir语录：技术派只有助分析未来六个星期的情况，对中长线分析毫无帮助，真正能帮助阁下赚钱的，是趋势(Trend)而非走势(Chart)。
50 曹Sir语录：投资二线股策略是翻倍或亏损15％离场，但不好感情用事。胜败乃兵家常事，千万不可有输不起心态。
51 曹Sir语录：投资亦一样有时赢、有时输、有时略有损失，但不能全军尽墨。三十岁前要博，六十岁后要稳。
52 曹Sir语录：投资市场上最大敌人并非别人，而是自己性格上的弱点。
53 曹Sir语录：投资成功先了解基本因素 , 再利用技术分析决定买卖时机 , 只识技术分析唔了解基本因素者 , 只系花拳绣腿 ( 睇得但唔打得 ) 。
54 曹Sir语录：投资最好三路进军，利用循环周期、趋势及摆动指数，制定长、中、短策略。
55 曹Sir语录：投资犹如生孩子，贵精不贵多，例如不应持有多于两只资源股，或是银行股和地产股。只有大财团才可开超市，散户只可经营精品店。
56 曹Sir语录：持有蚀本股不放有两大损失：A、股价上既损失, B、失去将资金投资其它项目既损失。因此绝对要止蚀。
57 曹Sir语录：损失就系损失，唔好以为未卖就唔系
58 曹Sir语录：无论情况如何紧记买涨不买跌。
59 曹Sir语录：旺市时不妨胆大D，因为形势在我 , 淡市时少玩 , 因为衰仔浸死人
60 曹Sir语录：欢乐过后，自然是哀愁。股市走势永远是钟摆，即由一个极端走向另一极端，然后物极必反。知所行止并非易事，所谓入市易、离市难。
61 曹Sir语录：欲投资成功，应先学习开阔自己的眼界，要用无国界的地球人的角度观察世界。
62 曹Sir语录：止蚀唔止赚, 通常卖出之后股价才大升, 我地少赚 50% 或以上。获利回吐易,止蚀卖出难, 只有克服上述心理, 才能在股市立足。
63 曹Sir语录：正直、有纪律、社会关系良好，有努力工作的人，较容易成功，而成功的人通常都同时拥有财富。
64 曹Sir语录：没有人永远选股正确，只要发现选股错误时，果断行使止损盘，在大趋势中胜出皆可。
65 曹Sir语录：没有基础分析作后盾的技术分析，只是花拳绣腿，不堪一击；同样只论股份优劣而不把握时机，可能呆坐十年，亦只见波幅而不见升幅。
66 曹Sir语录：注定命苦的行业：农业、零售、传媒、饮食。
67 曹Sir语录：牛市中错失获利机会冇有怕 , 因为下一浪更高；熊市中宁可赚少D，亦不应太迟离市。
68 曹Sir语录：现代人误解男女平等的意义，以为男女双方承担相同责任就是平等，而非男女各做自己所擅长的事。
69 曹Sir语录：男人的野心永不知止，性格大开大合，赚钱最终目的只为证明自己的能力。
70 曹Sir语录：男士们如欲娶得美人归，请努力为自己增值，不能单凭口甜舌滑，更需要有才华；对潮流有所认识、有品位、有要求，以及拥有过人的赚钱能力
71 曹Sir语录：男性在30岁以前，以为可用一身肌肉吸引女性，因此跑去健身；40岁以后，所谓『男性魅力』便由拥有多少财富决定！
72 曹Sir语录：真正的朋友可分为两种：一种是可以结成共同努力的伙伴。另一种是可以互补不足、互相挑战对方思维的人。
73 曹Sir语录：真真正正成功的投资者，通常都会花上很长很长的时间来审视自己，折磨出自身性格的长处、短处。
74 曹Sir语录：祝大家于三十岁前劲输一次，然后重新再来过。
75 曹Sir语录：离开学校后，我们若能每天保持看书一至两小时，足可改变自己一生。透过书本我们不但可以渐渐提升个人投资水平，更可改善个人素质。
76 曹Sir语录：第一次出现裂口上升时不妨买入, 如出现制裂回落系时候离开。
77 曹Sir语录：纸上谈兵易，行军遣将难。投资策略中最重要的“止损不止赢”、“买涨不买跌”两大要诀，如运用得宜，已可成为小富。
78 曹Sir语录：老曹强调有智慧不如趁势，醉心于捕捉大浪，喜欢于趋势形成时才加入市场，是『宁买当头起，莫买当头跌』、『止损不止赚』的信徒。
79 曹Sir语录：股市唔系低价买入高价卖出既地方( 冇人做得到) , 应该高价买入更高价卖出, 因此宜高追不宜趁低买入。
80 曹Sir语录：股市生存三大法则：第一，不要被杀。第二，不要对任何分析员有过分期望，我们都不是先知，任何分析员都作过错误的预测。第三，保本比增值重要。
81 曹Sir语录：股市表现可能同自己想法背驰好耐, 所以淡市莫估底 , 旺市莫估顶
82 曹Sir语录：股票市场是最严格的老师，总强迫我们去思考、去面对，考验我们的能力，并且不断攻击我们性格上的弱点。
83 曹Sir语录：股票市场系赚钱地方 , 因此绝对要跟红顶白而非锄强扶弱, 几时都应吸纳强势股，沽出弱势股。
84 曹Sir语录：自古名将出战场，没有人能靠纸上谈兵而成为一代英雄猛将。
85 曹Sir语录：许多人以为减息有利股市、楼市，事实并非如此。减息从来都不是好消息。
86 曹Sir语录：赚取第一个100万元，对生活的影响可能好大，赚到第一个1000万元时可能仍有感觉，再赚多下去，又是否十分高兴的事？见仁见智。
87 曹Sir语录：赚大钱需要的环境，就是股价在合理价之外上下摆动，情况有如河流在暴雨之后暴涨一样澎湃，但堤坝面临河水暴涨带来威胁，一旦崩堤便成灾。
88 曹Sir语录：赚钱唔系卖出股票的理由，卖出的真正理由应该系因为形势有变。
89 曹Sir语录：运用牛眼投资法，第一步是像一个风险投资家，追求100%以上的回报，专攻二线股。
90 曹Sir语录：长期吃货致富的日子已经结束，取而代之是三个W时代的来临–何处投资(Where)、买卖何股(What)、何时买卖(When)。
91 曹Sir语录：香港地产商之所以成为巨富，正因赶上1967-1997年香港楼市反复向上的大趋势。然后如此的大趋势，一生人难得见一次。