Publication date: August 14, 2024
Investing with Leverage Products: Turbo and Warrants Explained
In addition to traditional investments in stocks, mutual funds, Exchange Traded Funds (ETFs), and bonds, there are leverage products available for more experienced investors. Popular examples of these products include futures and Contracts for Difference (CFDs). It is important to remember that using leverage is an option, not a requirement with these products.
In this blog, we will introduce you to Turbos and Warrants, two popular leverage products among retail investors. We’ll explain the basic concepts so you can better understand how to potentially profit from market movements with a relatively small amount of capital.
What is a Turbo?
A Turbo is a financial product that allows you to profit from price movements of an underlying asset (such as a stock or index) without owning the asset itself. Turbos are particularly popular due to their leverage effect.
Key features of a Turbo:
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1. Leverage: With a Turbo, you can take a larger position with a small amount of capital. This means that both your gains and losses are amplified.
2. Underlying Asset: This can be anything from stocks, indices, commodities, or currencies.
3. Financing Level: The Turbo has a financing level that determines which part of the investment is financed by the issuer. You only pay the difference.
4. Stop-loss Level: Each Turbo has a built-in stop-loss level. If the underlying asset reaches this level, the Turbo is automatically terminated, and you lose your invested amount.
5. Long and Short Positions: With Turbos, you can bet on both rising prices (long) and falling prices (short).
Example: Suppose you expect a stock to rise. Instead of buying the stock directly, you buy a Turbo long. If the price increases, you benefit from the leverage effect, and your profit is greater than with a direct purchase. However, if the price drops and the stop-loss level is reached, you lose your initial investment.
What is a Warrant?
A Warrant gives you the right, but not the obligation, to buy or sell an underlying asset (such as stocks) at a predetermined price within a specific period. Warrants are often issued by companies or financial institutions and are attractive to investors who want to capitalize on price movements.
Key features of a Warrant:
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1. Underlying Asset: This can be a stock, bond, index, or commodity.
2. Strike Price: This is the price at which you can buy (call warrant) or sell (put warrant) the underlying asset.
3. Expiration Date: Warrants have a limited lifespan. After this date, the right to buy or sell the underlying asset expires.
4. Leverage Effect: Like Turbos, Warrants offer leverage, meaning small changes in the price of the underlying asset can have a larger impact on the value of the Warrant.
5. No Obligation: You have the option to exercise your right, depending on market conditions.
Example: Suppose a company issues a call warrant with a strike price of €50. If the stock price rises to €70, you can buy the shares for €50 and immediately sell them for €70, making a €20 profit per share (excluding costs).
Warrants vs Options: What’s the Difference?
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- Issuer: Warrants are typically issued by companies or financial institutions, while options are traded on exchanges.
- Duration: Warrants often have a longer duration than options.
- Dilution: When warrants are exercised, new shares may be issued, potentially diluting existing shareholders. This is not the case with options.
Conclusion: Who are Turbo and Warrants Suitable For?
Turbos and Warrants are mainly suited for experienced investors who are actively trading and willing to take on more risk in exchange for potentially higher returns. They offer opportunities to profit from both rising and falling markets, but they also come with additional risks due to the leverage and stop-loss mechanisms.
Before starting with these products, it’s important to meet certain capital, knowledge, and experience requirements set by your bank or broker. With proper preparation and a solid strategy, Turbos and Warrants can be a valuable tool in your investment portfolio.
Note: Investing in leverage products carries risks. Ensure you fully understand how these products work before you start trading.
Disclaimer: Investing involves risk. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. They are therefore for educational purposes only.
