Reasons to invest in warrants

You may invest in warrants in order to achieve leveraged returns, diversify into a market or sector, protect the value of your underlying assets or earn extra income. 

There is a wide range of warrants and types available on ASX. The reasons you might invest in one type of warrant may be different from the reasons you might invest in another type of warrant. For example, you may invest in instalments to trade for dividends, but may use equity warrants to trade a short-term view of a particular share.

Alternatively you can use different types of warrants to achieve the same goal. For example, you can use either instalments or trading warrants to achieve a leveraged exposure to a bullish view of a stock.

Achieve leveraged returns

Warrants offer some degree of leverage, meaning that small percentage changes in the value of the underlying instrument result in larger percentage changes in the value of the warrant. This is because you gain exposure to the fluctuation of the underlying share price for a smaller monetary outlay than buying the shares outright. Leverage can range from negligible to significant depending on the type of warrant. Generally, investment-style warrants offer less leverage than trading-style warrants.

Just as leverage provides the potential to make high percentage returns, it also involves the risk of making large percentage losses.

Diversification to a market sector

Certain types of warrants, such as index, basket and currency warrants, offer you the opportunity to profit from movements in the broad sharemarket or in a market sector. This enables you to diversify your portfolio without having to select individual securities. Structured Investment Products offer an additional level of protection by guaranteeing the face value of the warrant at maturity. You can also use instalments and endowments to diversify when building a share portfolio.

Protect the value of underlying instruments

Put warrants allow you to protect the value of your portfolio against falls in the market or in particular shares. By buying a put warrant, you lock in a selling price for the underlying asset such as a share,an index or a currency for the life of the warrant. You can consider the purchase of a put warrant as a form of insurance against a fall in share price.

Instalments and Structured Investment Products can provide you with alternative methods to protect a share portfolio. 

Earn extra income

Instalments offer you the opportunity to earn extra income. Instalments entitle you to the dividends (and any franking credits) paid on the underlying share. Because your capital outlay on an instalment is less than the cost of the underlying share, the income stream on the instalment is proportionally larger. Other investment-style warrants such as endowments may also help you to benefit from dividends.

Some Structured Investment Products offer you the opportunity to earn an income with the benefit of a capital guarantee at expiry.