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 THE ABC OF... |
Warrants
Choosing a warrants broker
CS journalists
It isn't too much of an ask for an online broker to offer warrants - since warrants trade on the Australian Stock Exchange (ASX) just like shares. Therefore most online brokers will let you buy and sell warrants, it's just a matter of checking out the type of warrants on their list.
Most online brokers will charge the same brokerage on warrants as shares. See the comparison tables to compare brokerage fees and other account information across Australian discount brokers.
Not all warrant types will suit you, however, so take note on the type of warrants available. Trading-style warrants are popular with traders looking to profit from a short-term price moves in such things as an individual share or basket of shares, indices, commodities, currencies or debt securities. Longer-term investment style warrants, which are popular with more conservative investors including self-managed super funds, are regularly purchased to boost dividend payments, generate tax savings and the possibility of scoring healthy capital gains over the long haul.
It's worth noting that there are two ways to buy warrants: you can buy a warrant at issue from the warrant issuer (see our list in the "issuers" table), or you can buy them second hand on the ASX. Buying a warrant at issue is like buying a stock at its initial public offering (IPO), or float.
Buying a warrant on the secondary market via the ASX is undertaken in exactly the same manner as buying shares in Rio Tinto (RIO), except that warrants have a six-letter code instead of a three letter code, for example RIOWMA. The first three letters are the stock code, for example Rio Tinto, the second letter is the type of warrant (W refers to equity warrants), the M refers to the issuer (here, Macquarie Bank) and the fourth is the market code for the warrant series.
Instalment warrants
By far the most popular warrant, the instalment warrant is a like buying a security on lay-by. You pay some now and some later, but enjoy all of the benefits - such as income and capital growth - as though you owned the security outright. In essence, you are taking out a loan with the warrant issuer to buy a security (let's say a share), and paying interest on it, while hoping that over the period of the loan, the security will increase in price.
Put simply, to buy an instalment warrant you outlay a small sum - at anywhere from 10 to 80 per cent of the cost of the shares - but added to this will be 12 months' worth of loan interest and a borrowing fee. At the end of the term - anywhere from one to five years - you can make the final instalment payment if you wish and take full ownership of the shares. But you don't have to. If the stock has completely tanked in the meantime, then you just walk away (admittedly having lost your initial instalment).
Instalment warrants are attractive when the underlying security increases in price. Basically, you're getting more bang for your buck since borrowings enable you to boost dividend payments, franking credits and capital gains. If you have limited funds, this entitles you to a bigger piece of the pie.
Food for thought: Instalment warrants are one of the only ways to borrow in a self-managed super fund (SMSF).
Rolling instalment warrants
Some warrant issuers let you delay your final instalment and instead roll into a new series. Check our table for those who'll roll over.
Trading warrants (calls and puts)
The nice thing about trading warrants is that, unlike options and futures, they are bought and sold on the ASX like shares. For speculators looking to punt on short-term price moves - warrants might be just the vehicle you've been hunting for.
Trading warrants consist of calls and puts. Options and futures traders will be all too familiar with this terminology, but newcomers take note: a call warrant is purchased when you think the underlying security (either a share, index, currency or commodity) will increase in price over the life of the warrant. A call warrant grants you the right, but not the obligation, to buy the underlying security - such as a share - for a fixed price, called the exercise price, at a future date. If the share price is lower than the exercise price on the expiry day, the warrant is worthless. If the share price has appreciated over this time frame, you're in line to receive your reward.
A put warrant involves the opposite scenario. Basically you buy a put warrant when you think the underlying share will fall in price, and if it does, fantastic. If not, you will lose your initial outlay.
Knock-out warrants
Also known as Turbos, think of knock-out warrants as trading warrants - call and put warrants - with gusto. These warrants combine big leverage with big risk. And they're not called knock-out warrants for no reason: these warrants come with an agreed barrier level, or share price, which if breached - in other words, should the share ever trade at this level - will terminate your Turbo automatically. This means that you forfeit your upfront payment.
If at maturity, the shares haven't breached the barrier level, then the warrant issuer will reward you the difference between the closing price of your shares and the exercise price of the Turbo. Knock-out warrants are the warrant choice of the braver amongst us.
Structured Investment Products
Structured Investment products basically combine warrants and other derivatives such as options in a package that is digestible to more conservative or less savvy investors. Many of these products offer 100 per cent capital protection - yes, that's right, you can't lose a cent - although you will pay for this security in the form of higher interest costs and the like.
To check out the range of warrants brokers available go to our warrants brokers comparison tables.
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