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Types of warrants

Warrants fall into two main groups - trading warrants and investment warrants. This information is provided for educational purposes only and does not constitute financial product advice.

 

Balancing risk and reward

Different types of warrants can offer different levels of risk and reward. In general, the higher the potential return, the higher the risk. Because warrants do not have standardised terms, it’s important to read the disclosure document carefully to understand the risks, and discuss your objectives and financial situation with an accredited derivatives adviser before investing. 

Trading warrants

Trading warrants are short-term warrants, often used by investors seeking to profit from market movements or protect an existing investment. Trading warrants usually use higher levels of leverage than investment warrants. As a result, they are generally higher risk. You should understand the specific terms of any warrant before trading. The terms will be laid out in the product disclosure statement (PDS) or offering circular.

MINIs are open-ended warrants with no expiry date, offering leveraged exposure to either rising or falling markets. MINIs are available over a wide range of shares, indices, currencies and commodities, among other securities.

Like other MINIs, Guaranteed Stop Loss (GSL) MINIs offer leveraged exposure to either rising or falling markets, depending on the warrant, with the added protection of a guaranteed stop loss level that ensures investors can’t lose more than their initial investment. In return, you may need to pay a Gap Premium. Open-ended, with no expiry date, they are available over shares and indices.

Equity and index warrants are trading-style warrants giving you the option of buying or selling an underlying share or index at a set price on a fixed date. As a result, they offer leveraged exposure to either rising or falling markets, depending on the warrant you choose.

Like other equity warrants, international equity warrants give you the option of buying or selling an underlying share at a set price on a fixed date. The difference is that they are available over shares quoted on an overseas exchange. That can lead to extra complexities you need to consider – for example, conditions on the exercise of the warrant and arrangements for the delivery of the underlying share. You should speak to your accredited adviser about the additional complexities of these warrants. 

Turbos, or Knock-Out Warrants, are trading-style warrants with a pre-defined knock-out level. If the underlying share or index rises or falls to the knock-out level before the expiry date, the warrants are terminated immediately. Like other equity warrants, Turbos give you the option of buying or selling an underlying share or index at a set price on a fixed date, as long as they are not terminated first. Depending on the warrant you choose, they may offer a higher level of leveraged exposure to either rising or falling markets, with a higher level of risk.

Investment warrants

Investment warrants offer leveraged exposure to shares, Exchange-Traded Funds (ETFs), Australian Real Estate Investment Trusts (A-REITS) and a variety of other underlying assets. Some investment warrants can also provide access to any dividends and franking credits. You should understand the specific terms of any warrant before trading. The terms will be laid out in the disclosure statement. You should also seek independent professional tax advice to determine if you are entitled to franking credits, as individual circumstances may vary.

Bonus Certificates can enable you to earn a positive return in flat or slightly falling markets, without sacrificing potential gains if the market rises above the Bonus Level. As long as the underlying security doesn’t trade at or below a pre-determined lower Barrier Level during the life of the warrant, you’ll receive a pre-determined Bonus Payment. If its value is above the Bonus Level when the warrant expires, you’ll also receive the full benefit of that rise, in addition to the Bonus Payment. However, if it trades below the Barrier Level, you won’t receive a Bonus Payment, and may make a loss when the warrant expires.

Instalment warrants give you exposure to an underlying share by making an initial payment which is a portion of its current price. During the life of the instalment, you’ll benefit from any dividends, franking credits and price rises in the same way as if you owned the share. When the warrant matures, you can choose to pay a final instalment and take ownership of the share, roll over into a new warrant series, or end the investment and receive any residual value.  

Self-Funding Instalments (SFIs) are instalment warrants that use any dividends paid on the underlying share to reduce your final instalment amount. Like other instalment warrants, they give you exposure to an underlying share for a portion of its current price. During the life of the instalment, any dividends and franking credits are used to pay off the remainder of the share price. Then, when the warrant matures, you can choose to pay the remainder of the final instalment and take ownership of the share, roll over into a new warrant series, or end the investment and receive any residual value.

Some SFIs also have a stop loss feature that ensures you won’t lose more than your initial investment if the value of the underlying share falls. It is important to note that if the stop loss level set by the warrant issuer is breached, trading in the SFI will cease. Unlike traditional instalments, Stop loss SFIs will also incur funding costs daily, rather than annually.

Like other instalments, Instalment MINIs enable investors to gain exposure to an underlying share for a portion of its current price, with the potential to benefit from any dividends, franking credits and capital appreciation during the life of the warrant. Each Instalment MINI has a stop-loss feature. If the Stop Loss Level is reached, this triggers a Stop Loss Event and the relevant Instalment will expire and any remaining value will be paid to the investor.

Like stop loss SFIs, Instalment MINIs also incur funding costs daily, rather than annually, unlike traditional instalments where interest on the outstanding instalment amount is prepaid until the next reset date or the maturity date, whichever is earlier.