Standard Bank has launched a new style investment product, known as a discount share instalment, that is 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 — and high liquidity due to the fact that the instruments are listed on the JSE Securities Exchange South Africa. There is also 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.
“When buying a discount share instalment the investor is in essence 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,” said Brett Duncan, head of warrants at Standard Bank.
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.
At maturity, discount share instalment holders have two options. They can pay the final instalment and take delivery of the underlying securities, or should they choose not to make the final payment, and a positive value remains in the instalment, this will be paid to them. – I-Net Bridge