What is a Turbo?

Turbos are financial instruments, listed on the London Stock Exchange. They provide, to private investors, geared exposure on bullish or bearish views for underlying asset at a fraction of its cost. With a limited life period and transparent prices. The Knock-Out barrier (in built barrier) will limit the downside risk to your initial investments, no matter how badly the market moves. So, in this way, Turbos combine "geared" returns with limited risk.

Turbos also provide all the benefits of a LSE listing: transparency, liquidity and their regulatory framework.

Turbos are issued by financial institutions, which maintain the buying and selling prices on the exchange, but they are traded through UK stockbrokers. In the case of a UK resident, Turbos cannot be held within a Shares ISA but can be held in a Self-Invested Personal Pension (SIPP) or Dealing account. Société Générale is the sole issuer in the UK market and its range of Turbos is updated on a regular basis depending on market conditions. Products are offered on major equity indices and UK blue chips.

How does it work?

Turbos are geared instruments, their price is lower than the underlying but move on an equal basis. As a direct consequence, small absolute price movements translate into higher percentage changes. The investor will choose a long Turbo if he anticipates a rise in the underlying price (bullish view) or a short Turbo if he anticipates a decrease (bearish view).

For example if Lloyds TSB (LLOY) is currently trading at 103.90p and you anticipate a rise, you may consider buying a Long Turbo (15.72p). If the share price of Lloyds TSB increases by 10p the price of the Turbo will also increase by 10p, thus giving a much greater return in percentage terms as you purchase the Turbo at a fraction of the cost of the underlying share. In this example, the Turbo increased by 63.61% compared to only 9.62% for the share.

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• Turbos contain a protection known as a knock-out barrier (stop-loss feature): should the market go against your view and the barrier be hit, the turbo expires worthless. Unlike other type of geared instruments, the knock-out barrier is in built from start into the issue price.

  With CFDs or spread betting however, to apply a guaranteed stop-loss level you will have to pay a premium. It is important to look at how close the knock-out level is to the current price of the underlying. If it is close then you may find yourself knocked out quickly.

  Traders need to estimate what is an appropriate knock-out level for them and should be aware that the further the price of the underlying is to the knock-out level, the higher the cost to purchase but the safer the turbo becomes. The knock-out barrier means your losses are limited and you can never lose more than your initial investment.

• Each Turbo has a certain life span (Maturity) within which it is permanently listed on the London Stock Exchange. Investors can trade these products up to maturity date, (usually 3 to 6 months when the product is issued), at which time they will be cash-settled automatically.

How Turbos compare with other derivatives?

Turbos offer an effective way to gain geared exposure on to major equity indices (FTSE 100, DAX and CAC40) and on UK individual blue chips. But how do they measure up against the many other derivative instruments on offer?

Probably the most popular derivative instruments among UK private traders are spread bets. A crucial difference between spread bets and Turbos is the tax treatment. Profits on spread bets are not subject to capital gains tax, whereas Turbos and covered warrants are. However, unlike ordinary shares and bonds, Turbo and Spread bet purchases do not attract stamp duty.

Turbos and covered warrants are geared products, which means you can make big profits from small asset price moves. They share this feature with spread bets and CFDs. However, unlike with those instruments, the risks are strictly limited with Turbos and covered warrants. Even if the market moves strongly against you, the most you can ever lose on a Turbo or covered warrant is what you put down to start with. With other derivatives, you can be asked for additional payments.

Last but not least, Turbos have low sensitivity to volatility, whereas Covered Warrants do.

Comparison table (source: Investors Chronicle, Master Class, October 2008)

	Gearing?	CGT?	Stamp duty	Maximum losses known in advance	Range of underlying	Product time frame	Dealing costs	Exchange traded?
Turbos	Yes	Yes	No	Yes	Narrow	Short-medium	Medium	Yes
Covered Warrants	Yes	Yes	No	Yes	Good	mediaum-long	Medium	Yes
CFDs	Yes	Yes	No	No	Excellent	Short-medium	Medium	No
Spread betting	Yes	No	No	No	Excellent	Short	Low	No
Ordinary Shares	No	Yes	Yes	Yes	Complete	Long	High	Yes

When to use a Turbo?

They can be used to gear up your portfolio's returns. You may currently hold shares but believe the FTSE 100 may soon see a short-term increase. In this case, you could go for a long turbo on the index which, if the market does move as you expect, could boost your overall profits.

Short Turbos can be used for hedging strategies. If the underlying asset falls in value, Short Turbos will increase in value. If you are looking for a product to implement a bearish view or to limit downside risk (hedging), turbos make sense as they can be held in a SIPP or trading account (profits and looses on turbos and shares are subject to the same tax treatment).

To learn more about Turbos, join us at the first free SG workshop seminar, held every first Tuesday evening and Wednesday morning of the month. By attending the workshop you will learn the basic principles of Turbos and how to use them depending on your investment strategies and risk profile. See Seminars section

There is an SG workshop held every month, register by sending an email to listedproduct@sgcib.com or call us now at 0800 328 1199.