Genevieve Wood -

Warrants are a type of derivative issued by a small number of financial instructions. They are traded on the ASX or Chi-X, and settlement occurs through CHESS.

Warrants derive their value from an underlying instrument, including:
> shares
> a basket of securities
> Exchange Traded Funds (ETFs)
> a share price index
> debt instruments
> currencies
> commodities

Warrants give holders the right to buy or sell the underlying instrument to the warrant issuer for a specific price, according to the terms of issue. Warrants are generally categorised as either a trading warrant or investment warrant, although some have characteristics of both.

The following table summarises the key differences between the two:

  Investment warrants Trading warrants
Why are they used? Borrow to invest in shares and increase exposure to potential capital growth, dividends and franking credits Trade the rise or fall shares, indices, commodities and currencies
Features Longer dated and less frequently traded, lower risk/return profile and tend to have a higher initial outlay required Frequently traded and shorter dates, higher risk/return profile
Investment timeframe Medium to long term Short term
Key Benefits Leverage and no margin calls Leverage and no margin calls
Key investment risks Leverage can magnify losses Leverage can magnify losses
Used by SMSFs and individual investors SMSFs and individual investors
Examples Endowments and structured investment products Equity warrants, index warrants, barrier warrants and MINI warrants

Source: ASX

An instalment warrant gives the investor the right to buy the underlying asset with an initial part payment and an optional final payment. Key features of instalment warrants include:
> The investor is entitled to all dividends, distributions and franking credits
> Generally offered over ASX100 securities
> They are an eligible form of gearing for SMSFs.

A MINI warrant is also available as either a trading or investment warrant.

It’s important to note that warrants don’t have standardised terms, although they are limited by the constraints of the ASX Operating Rules and the law.

Read our 5 things you may not know about Warrants.

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