Category Investments

Another option

23 June 2004 Angelo Coppola

Standard Bank has launched a new style investment product - a discount share instalment warrant, designed to provide investors with a simple, low-cost alternative to buying shares directly in the market.

The product is designed to mimic the movement of a range of leading South African shares without having to pay the full purchase price upfront.

Instead of paying the full purchase price of the share on day one the investor will pay an initial instalment (typically 50%) on purchase followed by a second instalment (a completion payment) on expiry, at which point they would take delivery of the underlying share.

In the interim the client has the potential for capital growth, greater returns than holding the share itself (although with greater risk), high liquidity due to the fact that the instruments are listed on the JSE Securities Exchange with the added advantage of two-way prices being quoted by the issuer at all times, limited downside (being the initial instalment amount) as well as leverage without the risk of margin calls.

Says Brett Duncan, Head of Warrants at Standard Bank: “When buying a discount share instalment the investor is buying the underlying share forward at a future date.

The investor will pay around half the value of the share as an initial down payment, with the payment of the balance deferred until expiry.”

With these instruments the holder of the instalment is not eligible to receive the dividend payable on the underlying share. However, the dividend stream of the share is discounted into the price of the instalment upfront.

At maturity discount share instalment holders have two options:

1. They can pay the final instalment and take delivery of the underlying securities.

2. Should they choose not to make the final payment and positive value remains in the instalment this will be paid to them.

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