How do warrants work?
Most investors are aware of Telstra Instalment Receipts. Investors were offered a way of buying Telstra shares over time by paying two instalments. Instalments warrants work in much the same way – with two payments or instalments that entitle investors to full dividends and any franking credits after the initial payment has been made. The big difference with instalment warrants is that investors have an alternative choice other than making the final payment or selling the instalments – they can choose not to make the final payment. This limits the downside to the value of the initial instalment – usually around 50% of the price of the underlying share over which the warrant is offered. Instalment strategies for getting started An easy and straightforward way to use instalments is to invest in Self Funding Instalment warrants (SFIs). Since September 2005, both Macquarie and Westpac have launched a range of SFIs over blue chip stocks. This brings the number of SFIs on issue to 73.
The most commonly traded types of warrants are referred to as ‘Call’ and ‘Put’ Warrants. Call Warrants are used to trade upward movements in share prices whereas Put Warrants are used to trade downward movements in share prices. If you are trading Call Warrants you are going Long whereas if you are trading Put Warrants you are going Short. The following examples show how to interpret the ‘Warrant Tables’ contained in daily newspapers such as the Age and the Australian.
