Start investing with less
If you like the idea of getting exposure to the profit potential of shares for only a small upfront investment, then warrants might be right for you.
Warrants are derivatives, deriving their value from an underlying share or index.
They come in a variety of styles, designed for long-term investors as well as short-term traders. Depending on the warrant you choose, they may have an expiry date many years into the future. That can make them ideal if you’re taking a long-term view.
Choose your style
Warrants are traded on the ASX, just like shares. Different warrants have different underlying instruments — so you can choose a warrant over a share, an index, a basket of shares in different companies, a currency, even a commodity.
There are also warrants to suit different investment styles, including:
- Investment warrantsIf you’re investing for the long-term and looking for leveraged exposure to an asset, investment style warrants may be ideal for you. Depending on the type of warrant you choose, you can use them to earn extra dividends for a lower upfront investment, earn an enhanced capital gain, or create a share investment that pays for itself over time. But like any leveraged investment, they have the potential to multiply your losses as well as your gains.
- Trading warrantsTrading-style warrants generally have shorter expiry dates and usually a higher risk and return profile (although some like MINIs are open ended). Warrants suit investors looking to profit from their view of short-term market movements, but who prefer to avoid the complexities of the options market.
Three warrant strategies
- Earn more income. You can use an instalment warrant to gain exposure to securities for a low, upfront payment — far less than what you’d pay to buy the actual security. Even better, you’ll still earn dividends and franking credits, as if you actually owned the security.
- Trade on a view. Like options, you can use warrants, such as MINIs, to profit when your view of future market movements proves correct, in both rising and falling markets. But unlike options, MINIs also have no expiry date, so you have longer for your view to prove correct.
- Leverage your SMSF. If you have a self-managed super fund (SMSF), you’re probably aware that your fund is prohibited from borrowing to invest. But you may not have realised that you can use an investment warrant to help your SMSF achieve leveraged exposure to shares, multiplying your potential profits (as well as your potential losses).
Understanding the risks
Like any leveraged investment, warrants can come with significant risks, so it’s important to do your research before you trade. The ASX’s warrants pages are a good place to start. If in doubt, seek professional advice.