How does turbo investing work?
Turbos, you’ve probably heard of them. A turbo is a popular investment product where you can profit considerably from price increases with a relatively limited investment. This has to do with the difference between the actual value and the value that you pay for the turbo. In practice, turbo investing is also often referred to as a sprinter, a turbo is in principle the same as a sprinter.
There are enough investors who profit on a large scale from turbos, but it is important not to count your riches right away. Investing in turbos also involves risks . In this blog we will explain the fundamentals of investing in turbos.
Underlying value of a turbo
To properly understand what a turbo is, you need to know that a turbo is always based on a so-called underlying value. For example, a turbo is based on regular shares, but it can also be based on indices or bonds. Do you expect an increase in an underlying value? Then you can buy a turbo long. However, it is also possible to respond to a decrease in the underlying value, this can be done with a turbo short. Read more about buying a turbo long and short .
Ratio of a turbo
When investing in turbos, you will often come across the word ratio. The ratio indicates the actual portion of the turbo compared to the underlying value. The idea behind this is that you can see how many turbos you would have to purchase in a fictitious case to represent the underlying value exactly once.
Duration
In principle, you could say that the term of a turbo is unlimited. In specific cases, there are still some snags. The situation may arise that you are forced to close your position early, for example when you are in danger of losing more than you have invested. In addition, when holding a turbo, you must take the interest into account.
Interest, the broker and the financing level
In the event that you speculate on a price increase, you take a so-called long position. You then buy the underlying value as it were without actually owning it. It is then up to the bank ( broker ) to take part of the price for its own account. This is also called the financing level. You pay financing costs on the financing level, better known as interest. After all, the bank also wants to earn something from it. The actual financing level changes from day to day.
It is important not to underestimate the relevance of the financing level. After all, this is also automatically increased when the underlying value of (for example) the share remains unchanged. The stop-loss – this is the point at which your position is sold at a loss – is also increased. This is generally considered undesirable, because the situation may arise in the long term that the stop-loss and the actual underlying value will be close to each other. As a result, you will make a loss even with the smallest price drops or your position will be closed immediately due to the tapping of the stop-loss. In the meantime, the bank has been able to profit from the interest you have paid.
When you are dealing with dividends that are paid out, this is deducted from the financing level. In the case that you are dealing with an index turbo, the weight of the share in question within the index is taken as a correction.
Turbos profitable?
In general, you can achieve very high results with turbos, even with a small investment. This makes it attractive. However, it can also work against you. As mentioned before, a broker works with a stop loss. You cannot lose more than your investment. Sometimes positions will be forced to close because this limit is exceeded. In fact, you will then lose all your investment. If you do not set the stop loss, you can sometimes lose even more than your investment.
Practical calculation example
To make it a bit more tangible, here is a simplified calculation example in which transaction costs are not included for the sake of convenience. Suppose you want to invest in a turbo from company A. The price of company A is around €100. In this example, the turbo costs €10, which is what you pay as an investor. The remaining €90 is added by the broker, which is the financing level. So you invest €10, but in this example you get ten times more value, so there is a leverage of 10.
Suppose the price rises to €150. If you had bought the regular share, you would now have a 50% profit. However, because there is a turbo with a leverage of ten, you can multiply this amount by ten. So you book a profit of more than 500% on the invested €10. Understand that this is an optimistic example and that the price could also have fallen drastically. In that case, instead of a record profit, you book a record loss.
Currency risk
In the event that you choose to trade in turbos that are based on a foreign share, you should be aware of the fact that you are running currency risk. This means that the exchange rate can change, which means that, for example, the profit in dollars is less high in euros because the dollar has become less valuable.
Conclusion: is investing in turbos sensible?
Whether you invest in turbos is of course entirely up to you. Ultimately, it comes down to weighing up the pros and cons. In fact, you are investing with borrowed money, you have to think carefully about whether or not you think this is wise and whether you can handle the pressure (mentally). With turbos, you can achieve high returns, while still being somewhat covered. As mentioned, you cannot lose more than your deposit (if the stop loss is used wisely). If you only invest with money that you can afford to lose, investing in turbos can be an interesting option to consider. However, keep in mind that you can always lose all your money in one go. Also read tips for investing in turbos to get off to a good start.
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