Investing in risky market plays a dangerous option

PUBLISHED : Sunday, 02 December, 2007, 12:00am
UPDATED : Sunday, 02 December, 2007, 12:00am

With the stock market moving in leaps and bounds, putting money into any of the plethora of investments on offer seems a more attractive financial bet than a bank savings account with, at best, single-digit interest. If the rise of the Hang Seng Index this year is any guide, there are far greater riches to be made through shares, options and warrants, logic says.

Unfortunately, logic and stock markets index movements do not necessarily go hand in hand. Nor does there always appear to be a good understanding of the risks involved, if the growth of investment in the riskiest choices amid volatility is any guide.

The consequences of a belief that the stock market is an answer to a financial need or problem can be dire. As we report today, police believe that two suicides and several attempts in the past six months were the result of bad investment decisions.

Exactly what the investments were is unknown. What is certain is that there has been a recent boom in Hong Kong of investment in the riskier of financial instruments, warrants and options.

Shares are part ownership of a company. Warrants and options are the right to buy or sell a share at a particular price.

While shares may be seen as a long-term investment, warrants as they are being played in the current volatile market are essentially a gambling instrument. Guessing the value of a share at a given date is purely and simply gambling.

There is more trading in warrants and options in Hong Kong than on any other market. The primary reason is that whereas in most other markets the price and expiry date are set by exchanges, here they are written and traded through numerous sources.

Needless to say, the purchase of warrants and options in mainland firms is particularly rife. The expectation of big, quick returns - as at a casino - is a driving motivation.

Big returns are possible. But because determining the risk amid market volatility is difficult, the chance of losses is equally great.

Our government does not issue casino licences. Yet the way warrants are being traded makes our stock exchange such a place.

People cannot be prevented from gambling, but they can be protected from risky behaviour through regulation. Investors need to be well aware of the risks involved in buying warrants and options, and - if necessary - rules tightening the trading of these instruments should be considered.