Warrants fall into two main groups - short-term trading warrants and long-term investment warrants.
Trading warrants are short-term warrants, used for either speculative trading i.e. trading the market long (making money from the market rising in value), trading the market short (making money from the market falling in value) or portfolio protection purposes such as hedging your existing investment.
Trading warrants usually use higher levels of leverage than investment warrants, and as such usually carry more risk.
Types of trading warrants
MINIs are the most popular trading warrant and are used by traders looking for straightforward leveraged exposure to shares, indices, currencies or commodities. MINIs can also be used to protect an existing shareholding or portfolio through hedging.
For a fraction of the cost of buying the underlying share, investors can participate in movements in the underlying share as if they were holding them directly. MINIs move on a one-for-one basis with the underlying share, have no expiry date and have an inbuilt stop-loss feature which means investors cannot lose more that their initial investment and will not incur a margin call if the trade moves against them.
Traders can buy a MINI Long when seeking to profit from a rise in the underlying asset’s price or buy a MINI Short when seeking to profit from a fall in the underlying asset’s price.
MINIs versus CFDs
MINIs have certain characteristics in common with contracts-for-difference (CFDs). As mentioned above, they mirror price movements in the underlying share or index, but do not require the trader to pay the full value of the underlying shares, and they offer exposure to falling markets. Unlike CFDs, the trader of a MINI can lose no more than their initial investment due to the inbuilt stop-loss feature.
|No expiry date|
|Able to trade rising or falling markets|
|1 for 1 movement with underlying asset|
|No margin calls|
For more information about MINIs and other trading warrants download the Understanding trading and investment warrants brochure.
Investment warrants appeal to investors looking for medium to long-term leveraged exposure to shares ETFs, A-REITS and a variety of other underlying assets. Several types of investment warrants, specifically instalments, also provide full access to dividends and franking credits*.
Instalments are the most popular type of investment warrant, accounting for more than 95 per cent of investment warrants on issue. In simple terms, instalments are a loan to buy shares. Investors do not have the obligation to repay the loan and will not receive any margin calls. The unique feature that sets instalments apart from other types of warrants is that you are entitled to dividends and franking credits* paid by the share during the life of the instalment. Instalments are also one of the few ways in which you can use leverage within a self-managed super fund.
There are three main categories of instalments:
- ordinary instalments
- self-funding instalments
- rolling instalments.
*Investors should seek tax advice to determine if they are entitled to franking credits as individual circumstances may vary.
Instalments versus margin lending
As instalments are a form of gearing, they are often compared to margin lending. Both approaches provide a geared exposure to underlying securities however there are some important differences to be aware of;
|Available over most blue-chip shares|
|Available for use in SMSFs|
|No margin calls|
|No credit checks|
|No mandatory loan repayment|