Instalments

[mehroon]

Hello I wish someone will answer this question. If I buy an instalment and then do not exercise my right to take up the share, do I lose the instalment or do I get something back? Assume that the market price of the share is below the exercise price.

[org]

yes

[Mighty_Mouse]

Instalments can be tricky - what happened since the global financial crisis is that many of them dropped below the exercise price, and they pretty much become worthless at that point. They work well on a rising market, but are dangerous in bad times. I was keen on them, but have steered clear since I took quite a loss (in some cases total loss) on some that I purchased last year before the crash. Also, it pays to check the dividend dates - they mostly expire just ahead of the distribution dates, so one even loses out on the dividends. Possibly the strategy to adopt is to start buying some selectively now in the hope that there will be a gradual rise in values. Also note, the 'turbo' instalments usually have a 'barrier' value, so in that case the bank pays you out if they fall to that level (thus you lose, but not 100%) Hope this helps

[mehroon]

Thanks org and mighty mouse. Your answers are appreciated.

[mehroon]

Hello Mighty Mouse. I would appreciate it if you could look at the trades on HVL instalments. On 9 June last year an institution/person bought instalments for R60 000 000. Now from what I have understood, this large sum will be lost if HVL does not recover to the R110 level. The dividends received will be some salvage. Is my conclusion correct?

[Mighty_Mouse]

Hello Micky I am not all that familiar with HVL, but as it is a resource share, it will have been adversely affected by the big drops in value. (I had Impala and lost heavily) I am not sure who would have ventured such a large sum on instalments as you quoted, but yes, my understanding is that it will be difficult to recover much, as the trading price is now well below the exercise price. HVL is a Standard Bank SI instalment, so I don't think that any 'Barrier' exists, BUT it only expires in June 2009, so there is always a chance that it retains some value until expiry. ALSO, I see that HVL normally declares their final divi around Feb, so if you are still holding the instalment at LDT, at least this would accrue tax free etc. A special div would also apply, but these resources companies are pretty much all under the whip, so who knows what the dividends will look like going forward. Maybe the safer option currently is to rather buy the 'underlying' share, i e buy fewer shares, rather than risk going the instalment route, unless you are banking on a rising market. Hope this assists.

[mehroon]

I am most grateful for your prompt reply Mighty Mouse - from Micky Mouse.

[_nova]

must be an ABSA customer ;-P

[barry_1]

Usually SBK installments automatically roll-over into new installments,when they expire ,unless u sell or if u want to exercise them i.e. turn them into the share u must phone them....Installments only work well in a rising market,as costs are taken off them and as they are geared you will loose more in a falling market than the underlying share....I only buy when they are nearing the LDT date and usually sell there after....At the moment i hold two installments....One on JDG and one on GND at the moment.They have have capital gain of about 25% in the last couple of months.