What are warrants?
A warrant is like an option. It gives the holder the right but not the obligation to buy an underlying security at a certain price, quantity and future time. It is unlike an option in that a warrant is issued by a company, whereas an option is an instrument of the stock exchange.
A great way to leverage their investment similar to Exchange Traded Options. There are many types of warrants, however they generally fall into two main categories; Investment Warrants or Trading Warrants
An alternative means of borrowing to invest in shares or various other asset classes. Client’s with a Self-Managed Super Fund’s are also able to trade Warrants.
Who should invest in Warrants?
Warrants can be suited to a variety of investors, from those who understand the benefits of gearing, to the SMSF who benefits from the limited recourse loan used to finance the purchase of the warrant.
Looking for exposure to the underlying asset but at a portion of the price.
Wanting to sell shares at some future point, uses warrants to protect their existing portfolio against a sharp drop in prices.
Warrants can be suitable for SMSFs because of the limited recourse loan helping to finance the purchase of the investments.
How can Warrants build your wealth?
Warrants are a popular investment for the following reasons:
Warrants are a cost effective means of gaining exposure to blue chip stocks, indices, currencies, commodities, etc.
Greater opportunity for profit
As you only pay the premium of the warrant to gain exposure to the underlying, the potential profit on the warrant can be much greater relative to the potential profit in the underlying.
Maximum loss is always known
Being the cost paid for the premium first up.
Warrants | Our services
We offer a number of services related to warrant trading which includes:
We can help you advise what warrant is suitable to your SMSF.
Advise you on warrants as a hedging strategy
Review your portfolio and, based on your client profile, advise a hedging strategy using warrants, against those stocks you wish to sell.
Advise you on diversifying your portfolio
Let us review your portfolio and, based on your client profile, advise on a cost effective way of diversifying using warrants.
Understanding the benefits & risks
Benefits of investing in warrants:
- Warrants allow investors to gain exposure to various types of Reference Assets
- Profits from investing in Warrants may exceed profits realisable from an investment in the Reference Asset (although at a higher level of risk)
- Risk limited to initial investment
- Warrants allow investors to speculate on whether the value of the Reference Asset will increase or decrease
- Opportunity to hedge an existing portfolio using Put Warrants
- FX Hedged Warrants allow investors to have exposure to Reference Assets denominated in a foreign currency without exposure to foreign exchange rate risk.
vTraded on the ASX, a regulated market
Risks of investing in warants:
- Warrants are speculative products
- Warrants are unsecured contractual obligations of the Issuer. The Issuer may not be able to perform its obligations under the Warrants
- Leverage increases the impact of both increases and decreases in the value of the Reference Asset on the value of the Warrants. Therefore leverage can magnify losses sustained when investing in Warrants
- Certain events may occur which the Issuer may designate as Extraordinary Events. If an Extraordinary Event occurs, the Warrants terminate early and investors may receive an early termination amount which may be of a lower value than the Reference Asset or cash amount otherwise receivable at expiry
- In relation to Barrier Warrants, early expiry if the relevant Barrier Level is triggered (in which case the Warrant will terminate and the investor will receive nothing)
- There is no firm indication of how the Warrants will trade in the secondary market and if the market will be liquid or illiquid
- Prevailing and anticipated economic conditions and interest rates could affect the market price of Warrants
Borrow to Invest – Instalment Warrants
Instalment warrants are the stockmarket equivalent of lay-by. You put a part payment down on shares today and pay the outstanding amount in one or more instalments later on.
But unlike lay-by conditions, warrant holders enjoy all the benefits of share ownership and can buy and sell their warrants on the ASX just like ordinary shares.
Instalment Warrants allow investors to buy shares in two payments. Once an investor makes the first Instalment, usually around half of the share price investors are entitled to any dividends, franking credits and capital movements associated with the underlying share as if they owned the shares outright. The First Instalment is made when purchasing the Instalment Warrants on the ASX.
The second Instalment, known as the Completion Payment is the limited-recourse loan offered by the issuer of the Instalments. Payment of the Completion Payment is optional at any time up until the maturity date of the Instalment Warrant.
Unlike other forms of borrowing to invest, such as margin lending, there are no margin calls, no credit checks and the most an investor places at risk is their initial capital outlay. That is, the purchase price of the Instalment Warrant. Instalment Warrants are suitable for investors who are looking to:
- Borrow to invest in Leading ASX-listed shares without margin calls
- Increase exposure to dividends and franking credits
- Build a medium to long term share portfolio
- Implement a gearing strategy within a Self-Managed Super Fund (SMSF)
Instalment Warrants have different features to suit a variety of investor needs. You need to read the Product Disclosure Statement provided by the issuer of a warrant to asses its features and whether it meets your trading and investment purposes, before you decide to invest. You will also need to sign a warrant agreement to commence trading in Instalment Warrants.
For more information about Warrants please contact the iInvest office.