Shares

The investment return from a share is based on dividend payments and changes in the capital value of the share. There are a number of different derivatives based on shares and groups of shares including:

Options

This is simply the right to buy a share at a specific price at a specific time in the future. The purchaser pays a premium for this 'right', which will expire worthless if not exercised. This is a very high risk investment, with the potential for total loss of the investment premium paid.

Traded Options

This type of option is similar to the above but may be traded in its own right and there is a market in buying and selling traded options. The options come in two varieties:

Call options, which give the right to buy an underlying share at a fixed price on a fixed date; and

Put options, which give the right to sell a share at a fixed price on a fixed date.

Both types of options can be bought or sold.

As with ordinary options these investments are very volatile and a small movement in the price of the underlying asset can give rise to a large change in the value of the traded option. The exercise of options (making use of the right to buy or sell) is optional (hence the name) and the majority of options expire worthless, giving rise to a total loss of the premium.

Futures

Whereas options are 'optional', a future is an obligation to buy an underlying asset (share, index or commodity) at a fixed time for a fixed price. The future may he bought or sold, providing the opportunity to benefit from a rise or fall in the value of the underlying assets. Futures can be created for individual shares as well as stock market indices, fixed interest stock and commodities.

Warrants

These are similar to options, but whereas an option will have a timescale of up to a year, warrants will have initial terms of two years or more. Warrants provide the right to purchase a set number of shares at a set price on a single or a range of dates in the future. They are very high risk with the potential for total loss where the share price of the underlying is below the price set in the warrant.

For more information, please contact us.