Lay-by your shares
Warrants are a way for an investor to lock in a price of an
asset now for purchase at some time in the future. They can also be
used as a way of putting a deposit down on a parcel of shares and
paying them off over time.
There are many different types of warrants. We explain two
simple types of warrants - ordinary warrants and
instalment warrants - how they work and what they offer. You will
see they are very different.
A warrant is a financial
product issued by a bank or other financial institution which
is traded on the Australian Securities Exchange (ASX). An
ordinary warrant is similar to an option (see futures
and options). It gives you the right to buy an asset (such as a
share), at a set price (called the strike price), until 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 are issued for shares, currencies, indexes and other 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 or forever (known as a perpetual warrant).
If the price of the asset rises above the strike price, you can
make a profit by exercising (buying at) the lower warrant
price and then selling 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. You will just lose
the initial purchase price.
Ordinary warrants are primarily used for speculative
trading. This is a high risk option and should only be used with
licenced financial advice.
Case study: André and the Telstra T2 float
the second stage of Telstra shares, known as T2 shares, were
floated in October 1999, T1 shares (first stage of the Telstra
sell-off) were trading for $7.78 per share. André decided to buy
some T2 shares. He had to pay $4.50 as a first instalment, prior to
the share listing on the ASX on 18 October 1999.
The second and final instalment of $2.90 (giving a final price
of $7.40) was payable on 18 November 2000. At this time Telstra
shares were trading for less than $7 per share. Even though the
shares had dropped in value, André still had to pay the final
instalment. He had only received dividends totaling 18c per share
within that year.
Within 3 years the shares were trading under $4 per share.
Instalment warrants let you buy an investment over a period of
time. You make a part payment on the shares and pay the 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 full dividends.
With unlisted instalment warrants, you can lose more than your
initial investment. You may purchase instalment warrants for
long-term investment from major financial institutions or
investment banks. These typically give you more time to pay and may
be less frequently traded on the market.
With ASX listed instalment warrants you will have a non-recourse
loan which is protected by an embedded put option or a stop-loss
An instalment warrant is primarily used for investing. They
could be seen as a form of gearing in that you can
get a large exposure for less money than buying the underlying
asset outright. Warrants would only be suitable if you were very
confident in the long-term value of the underlying asset.
Money owing on a warrant is treated as a loan and will have
an interest component and usually a borrowing fee. Interest can be
prepaid up to the life of the warrant so they may have tax benefits
for some investors.
Read the contract carefully and seek financial
advice before you invest in warrants. You can learn about the
different types of warrants in the ASX booklet: Understanding
Trading and Investment Warrants or their online
Last updated: 14 Aug 2015