Turbos

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 of the underlying asset at a fraction of its cost, with a limited life period and transparent prices. The built in Knock-Out barrier will limit the downside risk to your initial investments, no matter how badly the market moves. By doing this, turbos combine geared returns with limited risk.

Turbos also provide all the benefits of a London Stock Exchange listing: transparency, liquidity and their regulatory framework. They 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 an ISA but can be held in a SIPP or trading 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 moves on an equal basis. As a direct consequence, small absolute price movements translate into higher percentage changes.
Investors can choose a long turbo if they anticipate a rise in the underlying price (bullish view) or a short turbo if they anticipate a fall (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.

 

Turbos contain a protection (stop-loss feature) known as a knock-out barrier: 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 built into the issue price from the start. To apply a guaranteed stop-loss level with CFDs or spread trading, you would 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 very 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 if the price of the underlying is far from the knock-out level, the cost to purchase will be higher, but carry less risk. 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 from when the product is issued), at which time they will be cash-settled automatically.

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 a bearish view or to limit downside risk (hedging), turbos could be right for you. They can be held in a trading account, or in a SIPP where profits and losses on turbos and shares are subject to the same tax treatment.

It is necessary that you monitor your investment very closely. Turbos are geared instruments and their price magnifies the movement of the underlying. The movements in the distance between the underlying level and the KO barrier can be very sensitive. Further information to facilitate your investment observation and control is available on the SG Turbos website.

It is easy to trade in Turbos

You can trade Turbos through a or . Unfortunately, you cannot trade turbos as part of an ISA.

Risk Warning

Before trading you should fully understand the nature of turbos and the extent of their exposure to risk, indicating your understanding. If this is the first time you have traded in turbos you will be asked to complete an appropriateness assessment. The maximum loss is limited to the initial investment. Under LSE rules, turbos may not be shorted (selling a turbo without having purchased it).

Please ensure you understand turbos will be closed out if they hit the Knock-Out barrier set by the issuer.