Buzz
Emerging in the last 2 years, secured stock warrants have gained attention thanks to their high profitability. So, What are stock warrants? Is it worth buying them?
Insights into Stock Warrants in the Stock Market
1. What is a Stock Warrant?
Stock Warrant (abbreviated as SW) or Stock Option is a type of security issued by companies to enable the holder to purchase the company's stock at a predetermined price, regardless of market fluctuations.
For example, Company X issues stock warrants at a price of 94,000 VND per warrant with a duration of 11 months. Therefore, the warrant holder can easily buy Company X's stock at the predetermined price of 94,000 VND per warrant, as issued by Company X.
In case of price changes, whether increasing or decreasing, the warrant holder still purchases at the price of 94,000 VND per warrant. If the price drops to around 93,000 VND per warrant, you may choose not to buy.
What is Covered Warrant? Covered Warrant, abbreviated as CW, is an extended form of stock warrants where the issuing company guarantees to repurchase the underlying securities. Covered Warrants include two types:
- Call Warrants (Currently active, allowing holders to profit from the increase in underlying securities)
- Put Warrants (Not yet active, enabling players to gain profits when the underlying securities decrease)
2. Key Terms in Covered Warrant Investment
Covered Warrant investment involves numerous terms. When investing in covered warrants, it's crucial to grasp these terms for a smooth and advantageous investment journey.
Table of Terms in Covered Warrant Investment
3. Should You Buy Covered Warrants?
Wondering if you should buy covered warrants? This is a question that many people are currently interested in, especially those new to the stock market. Consider the advantages and disadvantages of covered warrants to make an informed decision for this question.
Advantages:
Covered warrants come with numerous prominent advantages. You can rely on these to decide whether to invest or not.
- Risk Reduction: Before the expiry date, if you notice a decreasing trend in the warrant's price, and you bought it at a high price, you can set a stop-loss order at the most appropriate time. This helps you minimize risks.
Drawbacks
Despite its advantages, similar to stock warrants, covered warrants still have their own drawbacks, specifically:
- High leverage risk: Compared to stocks and bonds, covered warrants have high leverage, so losses can result in significant damage.
- Short investment period: Depending on each issuing company, the investment period can range from 3 months to 2 years. Therefore, at expiration, you need to carefully consider and decide whether to sell or hold.
- Profit influenced by holding time: The price of covered warrants can fluctuate with market volatility. Hence, the longer the holding time, the more the price of covered warrants fluctuates, and vice versa.
Knowing the conversion rate of covered warrants helps you understand how many underlying securities you can exchange
4. What is the Conversion Ratio of Covered Warrants?
The conversion ratio of covered warrants indicates the number of warrants you need to hold to exchange for underlying securities. Holding a large quantity of warrants makes it easy to convert them into underlying securities.
For example, if the conversion ratio is 11:2, it means you need to own 11 warrants to acquire 2 underlying securities.
5. Is Covered Warrant a Derivative Security?
To understand whether stock warrants and derivatives are the same, you need to delve into the concept of derivative securities.
Derivative securities are financial contracts established by two trading parties, specifying the rights of both parties and determining the transaction price at the time of signing. These securities are issued by the securities exchange, and trading decisions will be collectively made, requiring an initial margin, and the trading volume will be determined by the product provider.
In contrast, covered warrants are issued and regulated by financial institutions, not requiring a margin. Therefore, covered warrants and derivative securities are two entirely different realms. Hence, when investing, you need to consider specifics for efficient and high-profit investments.
So, what is a covered warrant? Mytour has explained and shared all the information about covered warrants above. Hopefully, you now have the most comprehensive overview to make efficient and highly profitable investments in covered warrants.
If you're interested in diving into the world of stock options, you can easily register an account with brokers like HSC, VnDirect, SSI ...
- Explore more: How to open an SSI account
- Explore more: Steps to open an HSC account
- Explore more: Opening a VPS securities account
