Turbo & warrant

Publication date: Aug. 14, 2024

In addition to investing in stocks, mutual funds, Exchange Traded Funds (ETFs) and bonds, for the more practiced and experienced investor, there is the possibility of investing through leveraged products.
Familiar products with which you can create leverage are futures and CFDs. With the emphasis on "can" because it is a possibility and not an obligation with these products. Options are a separate class. Many complex options that almost always involve leverage.

Below we introduce you to the Turbo and the Warrant. These are leveraged products used by an increasing number of retail investors. Both products have the advantage that with a relatively modest amount of money you can profit substantially from price movements. In the Turbo even on both when the price rises and falls.

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What is a Turbo?

A Turbo is an investment instrument that falls under the category of structured products. It is often used by investors who want to profit from price movements (increases or decreases) of an underlying asset, such as a stock, index, commodity, or currency, without owning the underlying asset itself.

Main features of a turbo certificate:

1. Leverage: Turbo certificates offer leverage, which means you can take a larger position with a relatively small amount of money. As a result, the profit (or loss) can be greater than with a direct investment in the underlying asset.
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3. Underlying value: This can be, for example, a stock, an index (such as the AEX or S&P 500), a commodity (such as oil or gold), or a currency.
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5. Funding Level: The Turbo has a funding level that affects the price of the Turbo. The funding level is the portion of the value of the underlying asset that is funded by the issuer. You pay only the difference between the price of the underlying asset and the funding level.
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7. Stop-loss level: Each Turbo has a stop-loss level. If the underlying asset reaches this level, the Turbo is automatically terminated and you lose the amount invested. This protects you from a total or very large loss.
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9. Long and short positions: You can buy both Turbos that profit from rising prices (long) and Turbos that profit from falling prices (short).
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Example:

Suppose you expect the stock of a particular company to rise. Instead of buying the stock itself, you can buy a turbo long certificate. If the stock price does indeed rise, you will benefit from leverage and your profits will be greater than if you had bought the stock outright. However, if the price falls and the stop-loss level is reached, you will lose the investment in the Turbo.

Turbocertificates are popular among investors who actively trade and want to profit from short-term price movements, but they are also riskier because of the leverage and stop-loss mechanism.

What is a Warrant?

A warrant is a financial instrument that gives the holder the right, not the obligation, to buy or sell a specified quantity of an underlying asset (such as stocks) at a predetermined price (the strike price or strike price) within a specified period. Warrants are often issued by companies or financial institutions and can be attractive to investors because of their potential to increase in value.

Main features of a warrant:

1. Underlying Value: The value of the warrant is related to an underlying asset, such as a stock, bond, index, or commodity. It is usually shares of the company that issued the warrant.
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3. Exercise price (strike price): This is the price at which the warrant holder can buy (in the case of a call warrant) or sell (in the case of a put warrant) the underlying asset. This price is set at the time the warrant is issued.
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5. Expiration date: Warrants have a limited duration. After the expiration date, the right to buy or sell the underlying asset expires.
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7. Leverage: Like turbo certificates, warrants offer leverage. This means that a small change in the price of the underlying asset can lead to a relatively larger change in the value of the warrant.
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9. Call and Put warrants:
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    • Call warrant: entitles the holder to buy the underlying asset at the strike price.
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    • Put warrant: Gives the holder the right to sell the underlying asset at the strike price.
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11. No obligation: The holder of a warrant has no obligation to exercise the right. If the market price of the underlying asset is unfavorable compared to the exercise price, the holder may choose to let the warrant expire without taking action.
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Example:

Suppose a company issues a call warrant with an exercise price of €50 per share and a term of two years. If the company's stock price rises to €70 within that period, the warrant holder can buy the shares for €50 and immediately sell them for €70, earning a profit of €20 per share, excluding the cost of the warrant itself.

Similar to options:

Warrants are similar to options, but there are some key differences:

• Publisher: Warrants are usually issued by the company itself or by financial institutions, while options are issued by an exchange or marketplace.
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• Duration: Warrants often have longer terms than options, sometimes even several years.
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• Dilution: When warrants are exercised, new shares may be issued, which can lead to dilution of existing shares. This is not the case with options. Warrants can be an interesting investment vehicle for investors who want to profit from price movements with a relatively low initial investment, but they also carry significant risks, especially because of leverage and limited maturity.

Conclusion

Suitable for the practiced and proficient active private investor who, with somewhat modest capital, wishes to take additional advantage of price movements and accepts higher risk to do so. Especially in the Turbo there is a lot of choice of underlying assets. Note that you must meet several requirements before you can trade these products with your bank or broker. These are requirements regarding capital, knowledge and experience.

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.