China Life Insurance, one of the biggest insurers by market value, again attracted investors' interest to buy on dips after the stock plummeted around 30 percent within a week.

Net inflow of funds amounts to around HK$457 million into its related warrants and tops the turnover list for individual stocks. Warrant vs stock turnover ratio stands at approximately 1:3 thus investors' appetite for either stock or warrant investment is fairly indifferent.

If investors are optimistic about a stock, the easy strategy is to buy the stock. However, some investors may choose to buy a related warrant instead.

What is the difference? The main advantage of buying warrants is its leverage effect. It allowsinvestors to invest with less capital for the same return compared to purchasing the stock. However, like stock trading, warrant investment has its pros and cons.

Pros: Limited investment amount

Many stocks are rather costly to buy. Take the HSBC as an example, it costs about HK$48,000 to buy 1 board lot (400 shares) at HK$120 per share. For a 1 percent increase in the share price, the profit is about HK$480 (transaction cost excluded).

If instead an investor buys a warrant on HSBC, with an effective gearing of 7.5 times and a warrant price of HK$1, the investor needs only to pay HK$4,000 to buy 10 board lots of warrants (for example: 4,000 warrants). When the share price goes up by 1 percent, theoretically (assuming other factors remain unchanged) the warrant price should go up by 7.5 percent (1 percent multiplied by the effective gearing of 7.5 times), the profit from trading warrants would be HK$4,000 x 7.5 percent = HK$300 (transaction cost excluded).

With only around one-tenth of the original capital outlay, warrants attain similar level of profit compared to stock trading .

Cons: Time constraint

Warrants are not without their shortcomings. Its main shortcoming is time constraint. The price of a warrant will be adversely affected not only by falling underlying price, but also a declining time value. Warrants are derivatives.

They are an alternative investment to the underlying and not an absolute substitute for the underlying. Risk tolerance should be taken into consideration when managing your portfolio.

The price of warrants may go down and up and may become valueless at maturity, and under certain circumstances, investors may sustain a total loss ofinvestment. Investors should make their own appraisal of the suitability and risks of such an investment and should consult to the extent necessary their own legal, financial, tax, accounting and other professional advisors prior to the making of such an investment.

SG Securities (HK) Ltd provided the article.

(HK Edition 01/28/2008 page1)