TWSE urges investing public to be informed on stock warrant trade
By Ted Chen ,The China Post
December 5, 2013, 12:24 am TWN
TAIPEI, Taiwan -- The Taiwan Stock Exchange (TWSE) yesterday urged the investing public to be better prepared before participating in the trading of stock warrants.
In light of the financial instrument's rising popularity, the TWSE yesterday urged the investing public to first gain a fundamental understanding of warrants, including stipulations on warrants' time value, expiration date and restrictions on their use to avoid unnecessary negative returns.
The TWSE yesterday reminded the investing public that warrants are derivatives designed to yield potentially high returns while maximum trading losses are limited. The TWSE however, reiterated yesterday that warrants are issued with an expiration date. The investing public is also advised to familiarize themselves with the structure and features of warrants, including their conversion ratio, implied volatility, intrinsic value, and the concept of time value of money.
The TWSE explained that warrants are highly leveraged derivatives, requiring investors to produce 10 percent of funds required to capitalize on the change of stock movements in price. The derivatives' higher rates of return however, come at relatively higher risk levels than equities, said the TWSE, as warrants are subject to amplified volatility as the price of its underlying stock fluctuates on the exchange.
The most significant difference between equities and warrants is that the latter has a set expiration date, and are not designed for long-term investment holding, said the TWSE, adding that warrants are subject to only one-third of the customary securities transaction tax of 0.1 percent of value traded. Warrants are an ideal vehicle to utilize credit or leveraging for investors lacking the required cash position for margin trading.
According to statistics compiled by the TWSE, warrant trading volumes have been growing steadily in recent months. In November, there were 13 days when the warrant trading volumes reached the equivalent of 2 percent of the equities market, compared to the seven days recorded in October, said the TWSE.
According to the TWSE, over 40,000 warrant traders have been utilizing its Market Observation Post System (MOPS), which includes comprehensive trading activity information and historical data on all warrants actively listed.