This article first appeared in The Edge Malaysia Weekly on July 20, 2020 - July 26, 2020

Ample liquidity, partly caused by measures to alleviate the hardship arising from the economy shutting down owing to restrictions to curb Covid-19, has pushed up stock prices to multi-year and even record highs. However, investors could fall into a liquidity trap if they don’t understand what they are investing in.

Last week, the market was baffled by the gains in two put warrants on Top Glove Corp Bhd and Supermax Corp Bhd, when both the mother shares surged.

Obviously, the function of put warrants as a hedge against falling share value of the underlying stocks has been “abused”.

Although the prospectus of the put warrants is available on Bursa Malaysia’s website, how many really read and understand the term sheets? Are the issue and exercise prices, and exercise ratio, reasonable? What are the underlying risks if the mother share does not decline to the expected level?

Then, there is the emergence of “news” on blogs and forums of listed companies undertaking various deals, which have added fuel to frenzied trading of their stocks. Aren’t these companies required to publicly clarify the veracity of such news?

Do retail investors, who are said to be the primary drivers of the current rally, know what they are buying?

Is the speculative buying going a bit too far and should regulators be doing more to rein in the excesses?

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