Last week's single stock DLC activity led by Tencent

ON Nov 7, SGX launched Long and Short 5x Daily Leveraged Certificates ("DLCs") on 10 stocks that complement an extensive range of DLCs already available on stock indices.

The six SGX-listed stocks comprise DBS Group Holdings, Oversea-Chinese Banking Corp, United Overseas Bank, Singapore Telecommunications, Keppel Corporation and Venture Corporation. The four HKEx-listed stocks are Tencent, Ping An, CNOOC and PetroChina.

Tencent DLC most actively traded last week

For the first three sessions following the Nov 7 launch, the most actively single stock traded DLC was the 5x Long Tencent DLC [Stock code: DANW].

Tencent is an Internet-based technology and cultural enterprise, headquartered in Shenzhen and co-founded by its chairman Ma Huateng in 1998.

The stock makes up 9 per cent of the Hang Seng Index ("HSI") and is the HSI's second-largest constituent weight after HSBC Holdings.

5 times leverage

Throughout that first trading session, the 5x Long Tencent DLC formed a day low of S$1.990 and a day high of S$2.540.

This corresponded with moves in the underlying stock, which saw its share price up between 3 per cent and 4 per cent at its Nov 7 intraday high, and down approximately 2 per cent at its Nov 7 intraday low.

With the 5x leverage factor, this meant the 5x Long Tencent DLC was up between 16 per cent and 17 per cent at its intraday high, and down approximately 9 per cent at its intraday low.

The 5x means the new single stock DLCs offer fixed leverage of five times the daily performance of the underlying stock. As exemplified above, DLCs provide investors with the ability to make enhanced returns within a short period of time but also the risk of substantial losses if the underlying stock moves against the investor.

Compounding Effect

Investors should also note that if the trading horizon is over a few days, the performance of the DLC may vary from the leverage factor of the DLC. This is because the performance of the underlying asset and the DLC is reset at the end of each trading day.

When markets open the next day, the performance of the underlying asset and the DLC will be measured from the closing levels recorded on the previous trading day.

This means that any subsequent performance of the DLC is calculated based on the performance achieved the day before.

The same process is repeated on each trading day. Over the period of more than one day, the profits or losses are thus compounded.

DLCs are products with features that might be more complex in nature and are only suitable for investors who possess the investment knowledge of more complex products and have a high risk tolerance.

Hence, all investors need to be qualified to trade in Specified Investment Products ("SIPs") to be able to trade DLCs. Investors can speak to their broker to find out more on how they may qualify to trade SIPs.