Warrants are financial products issued over underlying securities (such as shares or exchange traded funds) that trade on the ASX. Some warrants give the holder the right to buy or sell an underlying instrument (for example, a share) for the price set in the terms of issue. Others entitle the holder to receive a cash payment that relates to the value of the underlying instrument at a particular time (for example, index warrants).
Warrants are available in a variety of structures that have different terms, risk profiles, underlying assets, maturity dates and exercise prices. Some warrants may also be used to provide gearing within a self-managed superannuation fund (SMSF), allowing the SMSF to gain exposure to a larger parcel of shares than it could obtain by investing directly.
- Geared investment – spend less of your own money while gaining a larger parcel of securities than if you buy them outright.
- More time to decide – you can tap into rising or falling markets without committing all your capital, by buying a call or put warrant.
- Potentially earn more income – enhance your income through instalment warrants, which can allow you to receive full dividends (or distributions) and franking credits while only paying a fraction of the cost upfront.
- Gain protection – protect your portfolio from falling markets by hedging with a put warrant that locks in a selling price for your existing portfolio.
- No margin calls – generally, there are no margin calls on warrants.
Warrants can usually be split into the following two categories.
These are suitable for investors seeking medium- to long-term exposure and can offer additional benefits such as protection of the value of the underlying asset. Examples of investment warrants include instalment warrants and endowments. Westpac issues Instalment Warrants including Westpac Vanilla Instalment Equity Warrants (Westpac VIEWS) and Westpac Self-Funding Instalments (Westpac SFIs).
Trading warrants tend have a higher risk than investment warrants and are more suited to investors who are willing to take higher risks in return for the prospect of better returns. Examples of trading warrants include call and put warrants, knock-out warrants and MINIs.
You should only trade warrants if you are confident that you understand the risks involved and have adequate financial resources. Some of the key risks include:
- Issuer risk – the Australian Securities Exchange (ASX), Cboe Australia and Westpac Share Trading provide a platform for trading warrants, but do not guarantee the performance of the warrant issuer or the warrants issued. Each warrant is a contract between the warrant issuer and you. Therefore, you are exposed to the risk that the issuer will not perform its obligations under the warrant.
- General market risk – the market price of warrants is affected by the same risks that affect all stock market investments, including movements in domestic and international markets.
- Leverage risk – gearing can magnify your losses as well as your gains. If the price of the underlying security falls, the price of the warrant may fall at a greater rate, and you may risk losing some or all of the money you invested. The gearing level may change materially as the price of the underlying securities and the loan amount change throughout the term. If the price of the underlying security falls, the price of the warrant will generally fall.
- Early termination or expiry – the completion date for a warrant may be brought forward when an ‘extraordinary event’ occurs (for example, the underlying securities are subject to a buy-back offer, a takeover bid, a scheme of arrangement or a demerger).
- Legislative tax change – new laws could be passed that affect the tax treatment or obligations of instalment holders.
Each warrant is different. This information only covers some general features and is not a summary. Read the issuer’s product disclosure statement, or equivalent disclosure document, before making a decision.
Things you should know
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