Small investment, large exposure

Warrants are a way for an investor to lock in the price of an asset now to purchase at some time in the future. They can also be used to put a deposit on a parcel of shares and pay them off over time.

There are many different types of warrants available to investors. Here we look at three common types of warrants: ordinary warrants, instalment warrants and MINIs; and explain the risks involved in investing in warrants.

Ordinary warrants

A warrant is a type of  financial product  issued by a bank or financial institution that is traded on the Australian Securities Exchange (ASX). An ordinary warrant is similar to an option. It gives you the right to buy an asset (such as a share), at a set price (called the strike price), on or before a date in the future (the expiry date). Options are usually short term (weeks or months) while warrants can be valid for a long time (years).

Warrants can either be exercised at any time before the expiry date (these are called 'American exercise') or only on the expiry date (these are called 'European exercise').

Warrants can be issued for shares, currencies,  indexes (domestic and international), exchange traded funds  and commodities. The strike price is usually higher than the current market price of the asset when it is first traded but is usually valid for an extended period of time; and some warrants such as MINIs or perpetual warrants have no expiry dates.

If the price of the asset rises above the strike price, you can make a profit by exercising (buying the asset) at the lower warrant price and then selling the asset at the higher market price. If you do not exercise the warrant it will simply expire, unused. So with ordinary warrants you can walk away and you will just lose the initial purchase price.

Call or put warrants

A call warrant gives you the right to buy the underlying asset so you benefit from an increase in the asset price. A put warrant gives you the right to sell the underlying asset so you benefit from falling prices.

Ordinary warrants are mainly used for speculative trading and are a high risk investment. Seek professional financial advice before you invest, to decide if they are a suitable investment product for you.

Instalment warrants

Instalment warrants let you buy an investment product such as shares over a period of time. You make a part payment on the shares and pay the remaining balance in one or more payments over time. It's a bit like a lay-by, except you get all the benefits of owning the shares from day one, such as receiving dividends and franking credits.

An instalment warrant is mainly used for investing. They are a form of gearing or leverage as you can get significant exposure for less money than buying the underlying asset outright. Generally warrants will only be suitable if you are very confident of the long-term value of the underlying asset.

Money owing on a warrant is treated as a loan and has an interest component and a borrowing fee. Interest can be prepaid for the life of the warrant so there may be tax benefits for some investors.

Case study: André's mining shares

""André wanted to invest in ABC Mining, a large blue chip resources company. The share price had fallen steadily over the previous few years but he thought it was only a matter of time until the price recovered, potentially giving him a healthy profit.

André decided to increase his exposure by buying instalment warrants. At the time the share price was $28. The first instalment was $15 (including funding costs) with a final instalment of $14 due 12 months later.

When the second instalment was due, the shares had dropped to $19. André had bought 1,000 shares, so with the drop in value he had lost a total of $10,000 on his original investment.

Self-funding instalments

Self-funding instalment (SFI) warrants are a special type of instalment warrant. Like standard instalment warrants, you make a partial upfront payment and the issuer lends you the remaining amount. Once you have made the initial payment, there are usually no additional repayments to be made until expiry.

Holders of self-funding instalment warrants receive dividends and franking credits from the underlying shares. The cash dividends are used to reduce the loan balance instead of being paid to you. SFIs have interest and borrowing fees that are added to the loan balance.

Investors hope that the dividends will be greater than the interest and fees, thus reducing the loan balance over time or even paying the loan off.


MINIs are a type of warrant listed on an exchange that can be traded over a range of underlying assets such as shares, indices, commodities and exchange traded funds.

Like ordinary warrants, MINIs allow you to make an upfront payment and borrow the balance from the issuer, who will charge interest and borrowing fees.

Unlike other types of listed warrants, MINIs have no set expiry date and usually track the value of the underlying asset closely. MINIs do not give you the right to purchase (or sell) the underlying asset, they only allow you to trade on the movements in the value of the underlying asset.

MINI warrants are classified as either 'longs' or 'shorts'. A MINI long allows you to benefit from an increase in the value of the underlying asset. A MINI short allows you to benefit from falling prices.

MINIs have an in-built stop loss mechanism which ensures you cannot lose more than your initial investment.


If an instalment warrant is not listed on a stock exchange you could lose more than your original investment. A listed instalment warrant is supported by a non-recourse loan and has a stop-loss mechanism.

Risks of warrants

Warrants are complex and high risk investments. There are many different types of warrants so it's important to look at the specific risks of each warrant. You will find this information in the product disclosure statement (PDS) provided by the warrant issuer or your financial adviser.

The general risks of investing in warrants include:

  • Counterparty risk - A warrant is a contract between the warrant issuer and you. This means you are exposed to the risk that the issuer may not meet their obligations under the warrant, such as providing the underlying security or cash as required.
  • Price risk - Warrant pricing is more complex than many other securities. It incorporates many variables including the underlying security or asset, dividends or interest and the time to expiry. Unless you understand how warrants are priced, trading them can be very high risk. The price of warrants is affected by the same market volatility as other traded investments.
  • Limited life risk - Most warrants have an expiry date, which can range from months to years from the issue date.  If the underlying asset price is not above the exercise price (or below depending on the type of warrant) and you do not exercise the warrant, it will expire worthless and you will lose your investment.
  • Leverage risk - Most warrants involve some amount of leverage.  Small changes in the underlying asset can lead to large changes in the value of the warrant. Leverage can increase returns, but also increase losses. The higher the leverage, the riskier it is.
  • Liquidity risk - This is the risk that you may not be able to sell your warrants quickly for a fair price. If the underlying asset or security is not frequently traded the warrant on that asset may also lack liquidity. The warrant issuer has a market making obligation under the ASX Operating Rules that seeks to minimize this risk.
  • Suspension from trading - The exchange on which the warrant is traded may suspend or remove a warrant from trading if the issuer does not comply with the exchange operating rules. A warrant can also be suspended if the underlying share (or asset) is suspended from trading.
  • Time decay - Warrants are decaying assets so it is important to monitor expiry dates and know when to exercise a warrant.

If you are concerned about the risks consider seeking professional financial advice to help you decide if warrants are right for you.

To find out more about different types of warrants read the ASX booklet Understanding Trading and Investment Warrants or take their online warrants and instalments course

Warrants are complex investments that can be used to help build an investment portfolio, if you know what you are doing. You should find out as much as you can about them before you invest and seek professional financial advice. 

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Last updated: 18 Mar 2016