Daily Leverage Certificate
DLCs or Daily Leveraged Certificates, are the fastest growing financial product in Europe.
And Societe Generale has brought the first of its kind to Asia, listing them on the Singapore stock exchange.
So let’s get right into this new product and the reasons that it has gained such immense popularity in the investment world.
What Is Daily Leverage Certificates?
Daily Leverage Certificate, which are listed on the SGX like a stock and traded just like a stock.
DLCs allow you to Long as well as Short without hassle.
They are designed to multiply the daily performance of an Underlying Asset by a factor.
In this case, 3, 5 or 7 times.
This means that if the Underlying Asset increases by 1%, your long position could profit by 3% or 5% or 7% depending on the leverage you chose.
Which Markets Are Available For DLCs Now?
Currently there are 3 markets,
1) SIMSCI – MSCI Singapore Index
2) HSI – Hang Seng Index
3) HSCEI – Hang Seng China Enterprises Index
How Does Daily Leverage Certificates Work?
When the Underlying Asset increases by 1%, the corresponding DLC will increase by 3% or 5% or 7%.
For example, if the HSI increased by 1%, the HSI DLC with 3x leverage, will increase by 3%.
This percentage return is calculated on a daily basis.
What Can You Do With DLC?
This product was designed to be traded intraday with returns leveraged by 3, 5 or 7 times to magnify the trader’s gains(and losses).
You can choose to trade this intraday or hold it over a period.
One of the unique features of this product, is the inherent compounding since it uses a percentage-based tracking system.
So during trends, the compounded gains MAY be higher than the actual gain of the Underlying Asset over that same period of time.
More on this compounding feature below.
A Few Interesting Features About This Product
1) You can use the DLCs to go both long and short. This offers you the flexibility to trade both rising and falling markets.
2) Compounding effect:
Because it works on a percentage change basis, holding for multiple days over a volatile periods, your returns will deviate from the 3x, 5x or 7x leveraged return.
Let’s do a trade example to illustrate how you can profit using DLC.
Let’s say yesterday we take a 100 shares long trade, on the HSI DLC with 5x leverage, at $2.00 price.
(Long trade = buy first, then sell back later to close the position)
This means we have invested $200 into the DLC.
$2.00 x 100 shares = $200
In the middle of the trading day, if the HSI moves up by 1% since today’s Open, the DLC will reflect a 5% gain at this moment.
This is because of the 5 times leverage which the DLC contract offers.
If HSI closes at 1% up, the DLC closes today at 5% up and the price of the DLC will become $2.10
So our position is now worth $2.10 x 100 shares = $210
This means we have profited $10 before fees.
Key Advantages Of Using DLC
– You get leverage but losses are only limited to the invested amount
– Long and short… with leverage!
– Compounding effect for those holding DLCs for longer periods of time. ie few days or weeks
– Airbag mechanism (slows down losses for traders, SGX has a detailed explanation of it on their website here.)
– Low capital required
– No complicated pricing factors, only one thing matters, the day to day % change in prices.
Conclusion: Daily Leverage Certificate
What I find most remarkable about this type of product, is that DLCs can offer quite a high leverage without the risk of losing more than your investment.
You can also go both Long and Short with DLC, which makes it great for both shorter term trading or hedging your portfolio of stocks against the broad market movements.
Note that due to the compounding effect, holding over multiple days could mean that the returns can deviate from the intended leverage.
This deviation can be either in your favour or against.
If there is a very strong trend is place, then the compounding effect will make your profit(or loss) larger than the intended leverage factor of 3x, 5x or 7x.