ELIZABETH TIAN | CitiFirst Warrants

· Podcast Episodes
What's a warrant and how can you buy now and pay later for your investments

Leverage can be a dangerous thing for investors as losses can be magnified. Leveraged products include CFDs, options and margin loans. Some of these products are pushed to inexperienced investors with slick marketing and promises of outsized returns. My guest today is Liz Tian from CitiFirst Warrants, and she talks about leverage, risk and alternative ways to access investments.

“I think of leverage as fancy finance word for borrowing and you know, most of us know what borrowing is. We all, nearly all of us have had to borrow to buy things like whether it's a car or whether it's your first property or an investment property. Leverage is another way of saying borrowing. So, where you may not have the money to buy, say, the car or your house in full, hardly any of us do, especially when we start. And where we then go to the bank and borrow so that we can actually buy that asset.” Liz Tian - CitiFirst

I've been fascinated by Warrants for a while now. Especially as Instalment Warrants are the only leveraged product that are allowed to be used in an SMSF. Here's a brief overview on the ASX website. Trading warrants are risky and are often used for short term trading. Instalment Warrants are designed for investment purposes.

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CitiFirst Instalments are an increasingly popular and flexible investment product, for both individuals and Self Managed Super Funds (SMSFs) who seek medium to long-term moderately geared exposure to the performance of shares in Australia's leading companies and indices.

Give Liz or Carsten a call on 1300 30 70 70 if you're interested to find out whether a CitiFirst Warrant product may be suitable for you, and keep in mind that all investing involves risk and leverage can magnify that risk. Here's a link to their Trading and Investments Guide.

A CitiFirst Instalment can provide a convenient investment opportunity for Australian investors and SMSFs. Investors gain the full economic benefit of share ownership for a fraction of the cost of purchasing the underlying shares outright. CitiFirst SFIs are listed and traded on the Australian Stock Exchange (ASX).

For SMSF investors, CitiFirst Instalments are one of the few means of gaining leverage in their portfolio.

Elizabeth Tian is Director, Citi - Equity Derivatives, Global Markets

Specialising in equities, multi asset products (FX, commodities exposure structures), derivatives sales and product management through multiple channels that include wholesale clients, financial advisers, private bankers, brokers & direct retail clients.

Products covered included equities, international equities, multi asset products, derivative structures, absolute return/ dynamic strategies, margin lending, managed funds & superannuation.

- Regular speaker for the Australian Securities Exchange (ASX) Roadshow & Kaplan CPD Education Program

- TV Interviews to CNBC, SKY Business News, Nine, Ten, SBS, ABC & Ausbiz.com.au

- Radio interviews to 2UE & ABC

- Print commentary for the Australian Financial Review & Reuters


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Phil (37s):

G’day and welcome back to Shares for Beginners. I'm Phil Muscatello. What is leverage and how does it affect your risk? What could it mean for your portfolio if you don't understand this risk? I'm joined today by Liz Tian. Hi Liz.

Liz (51s):

Hi Phil. How are you?

Phil (53s):

Good, good. Liz Tian is from CITI and she's director of equity, derivatives and global markets. But before we go into leverage and risk and so forth, tell us a bit about your background and your experience in the world of financial services.

Liz (1m 7s):

Yeah, so Phil, I was really lucky. After I finished my studies, I saw this job ad, and at that point in time I didn't know, but it ended up being COMMSEC when Commonwealth bank decided to start up their stock broking firm. And so, I knew nothing at all about, you know, markets, nothing about share trading, but I applied for the role and they told me all what they liked me because I happened to smile a lot in the interview. And the great thing was, you know, it was a group of about 12 of us and most of us knew nothing about the financial markets. We had a great six-week training course where they really taught us, you know, all the basics and kind of what we needed to know.

Liz (1m 50s):

So that was a great start. And I've been in finance since then. Really enjoy it, it’s obviously changed a lot in the last 15, 20 years without giving away my age.

Phil (2m 1s):

I think a lot of people did start in COMMSEC, didn't they? It was one of those things where they were just employing anyone to person the phones and a deal with clients.

Liz (2m 10s):

Yeah, no, absolutely. So many of us, you know, even today when I, kind of, meet people. Nearly half the people you meet, they somehow started working at COMSEC at some point in time. So, it was a great opportunity for all of us, kind of, newbies who knew nothing, kind of, get all that training and get that foot into the finance industry.

Phil (2m 33s):

So, what were some of the things that they were training you? What were they teaching you at that time?

Liz (2m 37s):

Really, really, it's amazing. I look back in hindsight now and it was so valuable. Basic things even, like, you know, when you buy shares, how many days does it take to settle? Most of us use a system called IRESS, how to use it, to bring up the share price. I mean, I remember I couldn't even understand at that point in time, you know, BHP, how does it turn from $14 to $14.20 cents where the TV, you know, every day they go "BHP share prices, $14.20 today." Like what makes that change? So, you know, really basics of what the share market is. You know, we started to learn all the different shares there are out there and operationally, how things work, how people physically buy a share and sell a share.

Phil (3m 25s):

So, we're going to focus a bit on leverage and risk today because that's really where you're working now. So, describe leverage to us. How does leverage work?

Liz (3m 35s):

So, I feel, I kind of think of leverage as fancy finance word for borrowing and you know, most of us know what borrowing is. We all, nearly all of us have had to borrow to buy things like whether it's a car or whether it's your first property or an investment property. Leverage is another way of saying borrowing. So, where you may not have the money to buy, say the car or your house in full, hardly any of us do, especially when we start. And where we then go to the bank and borrow so that we can actually buy that asset. So, what I do is we provide leverage to help people buy shares or ETFs, which are funds of shares.

Phil (4m 22s):

So, this is a different kind of leverage to the traditional kind of leverage. I mean, I've had personal poor experience with margin loans. So, we're not talking margin lands here. What's a margin loan?

Liz (4m 31s):

So, a margin loan is a special type of loan that people can get from the banks to buy specifically shares. And I suppose one of the risks with margin loans is that if the share price falls, you have things like margin calls and you can lose more than what you've put in. The type of borrowing we provide with warrants is, it's still leverage, I mean, there's still a lot of risk around that. Shares can be very volatile. And if you're borrowing, you know, you can potentially get really magnified gains but you can get magnified losses. But the main difference between our type of borrowing, or leverage, and a margin loan is you don't get margin called and you can lose only what you put in.

Liz (5m 21s):

Now I'm saying, "Oh, you can only lose what you put in." I suppose, a big proviso of that is you can still lose everything that you've put in if the shares fall enough. But then if you've only invested 2000, you can lose a full 2000, but you don't have to give the bank more than that.

Phil (5m 37s):

What's a margin call?

Liz (5m 39s):

So, when you borrow to buy an asset, if the asset keeps falling, the bank will ask you to keep putting money in. So, you'll get a phone call and you have typically 24 hours to put in more money. And if you don't, your shares get sold.

Phil (5m 57s):

And just have to copy any loss that you've...

Liz (5m 60s):

Correct. So, it is important. I mean, I've had a margin loan before. I had it through the GFC, I had it through the big sell-off we saw with COVID in March. I have only been, luckily, in a margin call once. So, the important thing, whether it's a margin loan or any type of borrowing or any type of share investment, is you've got to take into account things like how much can you lose? You know, you don't want to take on more than what you can potentially lose. So, I am fairly conservative with my gearing, it's only a small portion of my investments. I don't borrow too much and I make sure I have the cash flow where if things are falling, the share price is falling, I can make those margin call payments.

Phil (6m 47s):

And other ways of finding leverage are through CFDs and options as well.

Liz (6m 52s):

Yes, there are all different types of leverage with different features. So, it is quite important for someone who's starting out and looking at leverage to kind of really do a lot of research. Some types of leverage are higher risk than others. And, you know, typically CFDs are higher risk than, say, something where you might just take a 50% geared borrowing. If you've got lucky enough to have, say, a line of credit from your property. But, you know, there's no one that is right or wrong. It also depends on how you use it and what you're actually buying. I mean, it's very different if you take borrowing to buy blue chip shares versus borrowing to buy more speculative, highly volatile shares

Phil (7m 40s):

And, some products like CFD is a pretty heavily marketed as well. And I'd just like to point out at this stage, it's a bit of a warning for listeners as well to watch out for those brightly-coloured ads that you see about CFDs and how you can become a great trader with them. Let's move on to warrants, which your company, CITI and CITIFirst look after. What is a warrant?

Liz (8m 2s):

So, a warrant is a type of investment. Now, normally you can have very many different features with warrants, but more often than not, it's a type of borrowing. So, a warrant is in most cases, obviously, you know, different warrants have slightly different features. It is important that you kind of know what you're buying before you buy it. But very generally speaking, it's almost buying shares in two parts: buy one part now and pay the second part, the loan, later. So, it's almost a little bit like shares on lay-by or a buy now pay later type of structure in a simple kind of way.

Phil (8m 41s):

Okay, well, let's have a look at MINIs first. What's a MINI warrant. What's the characteristics of it? And how can investors use them?

Liz (8m 48s):

We've got two broad types of warrants and you know, the ASX and CBOE, kind of, define warrants as trading style and investment style. Now the trading style tend to be for people who want more leverage and, you know, usually just for shorter term and you can go long or short. Now, what does that mean, Phil? You know, we all know that if you buy something and then the share price goes up, you sell it. That's typically how most people invest. But there are times where you think, "Oh, I think the asset of something is going to fall." And that's when you go short, you're anticipating that there's going to be a fall in the share price and MINIs allow you to go both long and short.

Liz (9m 36s):

Meaning you don't have to just try and trade thinking that, you know, the market's going to go up. If you anticipate a fall, you can potentially use MINI shorts. And MINIs can be over shares, they can be over the index, like the ASX 200, or even international indices, like the NASDAQ or the Dow Jones or the S and P 500 and commodities and currencies.

Phil (9m 58s):

Gee, that'd have to be pretty sophisticated doing commodities or a foreign exchange.

Liz (10m 2s):

Absolutely. I mean, it is quite complex. It is very important that, you know, you've got to take into account lots of more different things like FX. The fact that overnight markets in the us are trading and, you know, therefore you're also exposed to that volatility every night as well.

Phil (10m 20s):

Okay. Well, let's have a specific example of a MINI and over one particular company. Okay, just to make it really simple, I'm assuming there's three aspects: it's the company, there's the amount of leverage and the stop loss that's involved.

Liz (10m 34s):

So, for a MINI, say, on, let's use CommBank as an example, we might have 20 or 30 MINIs over CommBank. You can either go, as I said, long or short, so if you think CommBank is going to go up, you would go long. If you think it's going to fall, you would go short. Now using long on CommBank, if it's a hundred dollars today, we might have MINIs on CommBank with an $80 loan. Therefore, it's basically saying, "I'm going to buy CommBank at a hundred dollars. I'm going to borrow $80 from CITI. And therefore, I've got to put in $20." Or someone else might go, "Oh, that's a little bit too aggressive for me. I'll buy a CommBank at a hundred dollars. I'll pick the one where I borrow $50 from CITI and I'll put in 50 myself."

Liz (11m 19s):

So, we've got a range of CommBank MINIs with different hearing levels and different stop losses as well. And you know, you pick the one that is most suited to your timeframe in your kind of the risk you want to take on.

Phil (11m 33s):

And so, if you buy these warrants, say you buy a hundred warrants for CommBank, CITI is then buying a hundred full shares of CommBank.

Liz (11m 41s):

Yes. So, when you go in and you buy that a hundred CommBank MINIs, behind the scenes were you're actually buying the CommBank shares. Because we're basically providing you a loan. And then when you sell your CommBank MINIs, we're selling the CommBank shares. So just like if you imagined you had bought Commonwealth Bank shares and they go up $5 in the period that you hold it, you're going to make $5 on the MINI. And of it falls $4, you're going to lose $4 on the MINI. So, the MINI moves cent for cent with a share price, just like you, the holder of the shares. And on top of that, you do pay an interest cost.

Liz (12m 21s):

So, it will move cent for cent with any movement of the share price. And obviously taking into account the interest costs, which currently is 5.2% on the longs and 3.3% on the shorts for the MINIs on shares.

Phil (12m 36s):

And how is the interest charged?

Liz (12m 39s):

Interest is capitalized daily on the MINIs.

Phil (12m 41s):

Sorry, just explain that. 'Cause that's a bit of a hard concept for beginners to understand, but it's deducted every day. So, the price of the MINI warrant is reduced by the interest amount every day, is that how it works?

Liz (12m 55s):

Correct. So, let's say you've bought CommBank and you hold it for a whole year and the CommBank share price never moves. You buy it on day one, it's a hundred dollars. Day 365, it's still a hundred dollars. Your MINI price is going to be less by one year's worth of interest. So, when you buy it and sell it, it's taking into account that interest rate that you've paid.

Phil (13m 19s):

With MINI warrants are you eligible to receive the dividends as well?

Liz (13m 22s):

So, it depends on whether you're long or short. You will receive the benefit of the dividends if you're long. And you will pay for it if you're short. Just like if you were holding the shares,

Phil (13m 35s):

Oh, so you actually pay the dividends if you're going short.

Liz (13m 38s):


Phil (13m 39s):

That's something to be really careful about.

Liz (13m 41s):

That absolutely is because essentially when you've gone short, you've borrowed someone else's shares and that person needs to receive their dividends.

Phil (13m 52s):

So, instalment MINIs, this is a kind of warrant. That's more suitable for people, for investing, I guess, with a more of a long-term timeframe. Tell us about those.

Liz (14m 1s):

Yeah, so Phil, I mentioned, you know, you've got two broad types: you've got the trading and you have investment style. Now, instalment MINIs sit in that investment style product. It's typically people who don't want as much leverage. So, they might borrow say anything from 30% to 70%, you can choose to have the dividend scope into your bank account or use to reduce the loan. And you'll get a tax statement in the year saying, this is my dividend income, these are my franking credits and this is the interest I've paid. And it's fairly popular with self-managed super funds.

Phil (14m 32s):

So, someone who's a new investor coming in, how would they look at one of these warrants to maybe get a foothold in the market? Just give us an example of that.

Liz (14m 43s):

So, you buy and sell these through your broker, such as COMSEC or nabtrade.

Phil (14m 47s):

So, they're exchange traded, you just buy and sell those on the exchange like any other

Liz (14m 51s):

Just like any other share. If you happen to buy a warrant on CommBank, it'll sit alongside your other shares. So, you see your BHP and NAB shares and then you'll see this CommBank warrant. Your share trading account will need to have a warrant agreement form. It's a one-off. But you can just buy and sell through your broker. Obviously, there's a lot of different warrants, lots of different features. Best thing is to call our desk. We've got some training guides and videos, but even just ask us so we can guide you through, you know, all the very many different variations and features.


But in the simplest example, say, you wanted to buy Commonwealth Bank using a warrant. And an instalment warrant can be used, I'm assuming. to pay off the loan using the dividends, is that correct?


Yeah, so, we've got different styles of instalment warrants. So, let's use Commonwealth Bank as an example. Commonwealth Bank, let's say today is $100. We might have 100 instalment warrants over Commonwealth Bank, you know, with different features. And they might range with different gearing levels. So, one might be fairly highly leveraged. So, where you borrow, say, $75 of that $100 and you put in 25 yourself. Or we've got some that’re, you know, much more moderately leveraged where it might even be 30% geared and you borrow 30% from the bank, the $30, and you put in the $70 yourself. Now instalment warrants have, kind of, a life. We typically issue them for up to five years and along the way, depending on which style you select, we've got ones which are, what we call, self-funding instalments. As you mentioned, any dividends from that is used to help pay down the loan. So going back to that CommBank example, you've taken an instalment on CommBank, its leveraged, so instead of paying $100 to get one unit of CommBank, you might pay say $50. You get the benefits of all the dividends and franking credits in the meantime. You do pay interest on the loan. The interest rate depends on the structure. It's approximately 5.05% for our most popular structure being the instalment MINI and the dividends might be used to reduce a loan if you select that style. And over time, you hope that the dividends pay down some of the loan. Now, Phil, whether it does or not, is I like to compare it back to say an investment property. Some investment properties are positively geared. Some are neutral and some are negative. There's no right or wrong. Depends sometimes on how long you hold it for, your leverage and you're hoping for capital growth. But what you're hoping is over time some of that loan’s paid down, equity share price has gone up. And in 5, 10, 15, 20 years’ time, whatever your timeframe, you can either pay off the loan if there's any left, or it might even pay off by that time.

Phil (15m 21s):

So, you're answering the phone, aren't you?

Liz (15m 28s):


Phil (15m 28s):

And what are some of the questions that people are asking?

Liz (15m 32s):

Oh, well, you know, questions like, how do I buy this? And you know, you're literally just buying it through your share trading account. How does the pricing work? They'll look at the CommBank warrant and go, "Well, $30. How does the pricing work if CommBank shares four by $2?" So, depending on the structure, as I mentioned, if CommBank drops $2, the pricing drops $2. Important things to know like how the pricing works, what the interest rate costs is, what are some other features like the stop loss is that we've discussed and the amount of risk that is most suitable for you and that you want to take on?

Phil (16m 8s):

So, are warrants, I know this is not very easy for each why answer legally, but is it a kind of a less risky product than some other leveraged products? There's risk in everything, we have to understand that.

Liz (16m 19s):

Absolutely. It is less risk in the sense that you can only lose what you put in, which is why you can use it in self-managed super funds. You know, not all types of borrowing is allowed in self-managed super funds. This type is 'cause you can only lose what you've put in. But at the same time, as you and I know Phil, someone buying property, you have a huge suite of people. You've got someone on very high income with a lot of cash flow and they're just buying an investment property and the rent can cover that and they've got a lot of buffer. And on the other end of an investment property, you can have people who are very leveraged. And so just like any type of borrowing, it's how you use the borrowing.

Liz (17m 3s):

What assets are you buying? Are you buying, you know, very blue-chip shares? Do you have a long timeframe? Have you taken into account things like the volatility in the share market? You know, if things become very volatile, like as we saw in March 2020 where there were huge falls, are you able to, kind of, sustain that volatility? So, the product itself is obviously got the risk, but how you use it as also very important.

Phil (17m 27s):

Talk to us about stop losses. What is a stop loss and how can they be used in warrants?

Liz (17m 32s):

So, some of our warrants have a stop loss feature. And so, it's important to know which ones you're buying, 'cause some of them have now a stop loss basically means you are going to sell out of your position. So that can be good. We all know if we sell out or something and it continues to fall, that's a great thing. But it's not a good thing if you sell out and it bounces and it goes back up and you've basically sold at a bad time. So, whether it's good or bad, depends on obviously what happens to the market, what's happened to your shares. So, the important thing is to select the stop loss, which you think is appropriate for you.

Liz (18m 15s):

And what do I mean by that? So, let's use CommBank as an example, it's a hundred dollars today. We might have stop losses on our CommBank warrants ranging all the way from $80 down to $30. Now someone might decide, "I really only want to hold it for one week. I don't think CommBank is going to fall to $80." But someone else might think, "Oh, I want to hold this for five years. I want to be quite conservative. I don't think CommBank is going to fall to $40 and select the $40 stop loss instead."

Phil (18m 42s):

And tell us about dividend harvesting. This is a strategy that some people use to basically be able to get as many dividends as possible without having to hold the shares as much. How does that work?

Liz (18m 52s):

Yeah, so it's quite popular, especially in self-managed super funds. We all know most shares only pay dividends twice a year. So, we hold if you a share, you're only going to get that two dividend. So, what some investors do is after something's paid a dividend, usually for at least 45 days, they will then sell out of that if the share price has smoothed back out and they're not making a loss on that particular trade and then swap into something else that's going to pay a dividend. So, using the banks, as an example, CommBank pays dividends at a different time from NAB, Westpac and ANZ. And people, instead of holding CommBank for the full year and hold, getting to dividends, they'll sell out of CommBank after it's paid its dividend, it's gone ex-dividend and swapping to, say, a Westpac, ANZ or NAB.

Liz (19m 42s):

And you know, other popular stocks that pay strong dividends now are even the Mining stocks.

Phil (19m 47s):

I'm also interested in finding out how sometimes warrants are issued due to investor demand like with ETFs recently. Tell us about that.

Liz (19m 58s):

Oh yeah. So, we get phone calls all the time from direct investors to brokers and they'll say, "Oh, you've got these five warrants on, Afterpay at that time was very popular, but you know, I want something a little bit more leverage. I want something a bit less leverage." And we'll get direct phone calls and even new up and coming stocks that we don't have a warrant over. We'll get phone calls and go, "Well, you know, look at this stock, can you issue a warrant on this stock?" So obviously it's subject, we need to get approval from the exchange, but we get those phone calls all the time where we can potentially set a new gearing level or issue a new warrant on an ETF or stock that we currently don't have.

Phil (20m 38s):

So, what are some of the smaller companies that have recently had warrants written over?

Liz (20m 43s):

Names like Paladin. So, we've had investors call up about, you know, stocks like Paladin, Imugene. Some of the brokers, you know, certain brokers have new IPOs on stocks and they're obviously very popular and we'll get phone calls and feedback from them to issue warrants on them. And what's been growing really quite well is the ETF market. So that's obviously, you know, been growing in popularity. We issue warrants on a lot of the ETF providers, like VanEck, BetaShares, Vanguard, BlackRock iShares.

Phil (21m 16s):

And you also have warrants over whole indexes or indices, I'm never sure what to say. So, there's all the US indices and Australian indices. Tell us about those.

Liz (21m 27s):

That's probably the most popular warrant we have at nearly any point in time. It's the ASX 200 warrants, the MINIs on ASX 200 futures. That's the most popular in terms of trading. And the reason is, investors who, kind of, like to trade, they want to trade an index because it takes away what we call single stock risk. Meaning you suddenly get a company with a bad announcement and even though the whole market's going up and you've got that trend, right, you're holding that one stock which suddenly has that bad announcement. So, people like to hold index because then they're just looking and focusing on getting that broad direction right.

Liz (22m 7s):

Rather than, you know, some specific news out on a stock that's, kind of, come out left field

Phil (22m 12s):

So, listeners, if they want to find out more about warrants, they can just call you directly, can't they? And talk to you directly at the desk to find out how these products can be used.

Liz (22m 21s):

Absolutely. We've got a team. So, call us 1300 30 70 70. You know, there's warrants, there's lots of different features of them, different risk. So, it is important that investors understand them. So absolutely. And we can guide them to what's most appropriate.

Phil (22m 36s):

And the website as well. There's a lot of information and education there as well?

Liz (22m 40s):

We've got trading guides, we've got videos. It's probably one of the easiest ways to find what you're looking for. You know, it's got this select button. You can just go CommBank, long, instalment MINI, feature. And it'll just give you that list of what you're looking for.

Phil (22m 54s):

Liz Tian, thank you very much for joining me today.

Liz (22m 57s):

Thanks very much, Phil.

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