Warrants

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.

Ordinary warrants

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

""When 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

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.

Warning

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 mechanism.

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 warrants and instalments course


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Last updated: 20 Aug 2013

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