Monday, 15 July 2013
Investment is very diversified, with different investment vehicles offering varying levels of returns with different levels of risk.
In this Dissecting Investment Vehicles miniseries, we introduce some of the more common investment vehicles available in Malaysia, explaining their features, their Risk Levels, Returns, Liquidity, and Initial Capital Requirements.
The first part introduces you to Stocks/Shares and Warrants, the most common investment vehicles.
Stocks/Shares (Shares) represent the ownership of a Public Listed Company (PLC). By purchasing shares, thereby owning them, you become the shareholder of the PLC, and you are entitled to voting rights during meetings, and to the earnings of the company in the form Dividends issued. When a PLC enters insolvency or bankruptcy, priority is given to lenders and creditors to claim their dues. Shareholders are the last to such claims. That said, shareholders and the PLC are separate entities, and shareholders do NOT inherit any debts.
Shares are a versatile investment vehicle, depending on your Risk Appetite and the company you invest in. A more well known company will more likely to be more liquid due to the Volume of trades. The risk level also varies according to the volatility of the counter you're investing in. Initial Capital Requirement depends very much on the share price of the counter, with blue chips requiring higher Initial Capital Requirement, and penny stocks requiring less.
Depending on the share price, the volatility of your profits or losses varies. For example, an increase of RM0.10 in a counter priced at RM0.10 lands you a 100% profit, while the same increase of RM0.10 in a counter priced at RM1.00 lands you only a 10% profit. The same applies to loss.
Warrants are contracts that give the holders the right to purchase Shares from the issuer (the company) at a specific price, usually lower, within a certain time frame or before a set date. Warrants are traded similarly to Shares/Stocks, but require lower capital than the mother share it represents and provides greater returns but also higher risks.
For example, a share is now trading at RM1, and its Warrant entitles you to purchase its shares at RM0.70, a RM0.30 discount. The warrant itself is priced at RM0.30. So you can purchase the warrant at RM0.30, exercise your rights now and acquire the share at only RM0.70. However, if you hold onto the warrant and the share moves from RM1 to RM1.20 (thus the Warrant moves from RM0.30 to RM0.50), and you sell your warrant then, you would have a RM0.20 profit. The profits are the same RM0.20 whether you purchased the Warrant at RM0.30 and sold it at RM0.50, or purchased the ACTUAL shares at RM1 then sold it at RM1.20. However, your Profit Margin is very different. With Shares, the RM0.20 profit gives you only 20% Profit Margin, but with Warrants the RM0.20 profit gives you a 66.67% Profit Margin. The same applies to loss.
In Malaysia, issued Warrants expire in 5 years. Normally, holders are allowed exercise their rights anytime within this 5 year period. However, some do specify a specific time frame for exercise of rights.
By the Young Investors Team