Types of Warrants

There are many ways to look at warrants that are traded on the main Australian stock exchange (the ASX), and understanding warrants can take some time. First, it's important to understand that there are numerous different types of warrants that can suit a range of purposes, and all warrants trade an underlying asset. This could be stocks, commodities, currencies or a combination of assets.

It's also important to know the style of warrant, which can be either American or European. An American warrant can be exercised at any time while a European warrant is exercised on expiry.

The ASX marks a loose distinction between two different types of warrants - an investment warrant and a trading warrant. An investment warrant is suitable for mid- to long-term investors, and these usually give access to dividends, franking credits and other benefits.

There are several different ways investment warrants can be structured, including ordinary instalments, rolling instalments or self funding instalments among others. Each of these different types of warrants functions differently.

• Ordinary instalments (or vanilla warrants): These give full access to capital growth, dividends and franking credits. An initial, part payment is usually made up front with the option of full payment upon expiry.
• Rolling instalments: These warrants work similar to ordinary instalment warrants, but the loan is reassessed at set intervals where either you or the issuer may have to settle any differences. The purpose of a rolling instalment is to preserve warrant gearing, and the issuer can choose to terminate on an assessment date. You gain full access to growth, dividends and franking credits with these warrants.
• Self-funding instalments: These warrants use dividends to fund initial loan amounts, which can potentially create a positively geared investment. You still have access to franking credits.

The second type of warrant you will find on the ASX is a trading warrant, and these also offer leverage with the added ability to be used as a hedging tool. You can find the following types of warrants traded on the ASX.

• Call warrants and put warrants: These are the most common trading warrants that give the owner the right to buy or sell the underlying asset. They are usually used for speculative purposes and traded over the short term.
• Knock out warrants (or turbo warrants): These work just like put or call warrants, but the knock-out barrier feature will cause the warrant to expire if a certain pre-set price is reached. These warrants are generally issued as 'in the money'.
• MINIs: These warrants have the same benefit of leverage as other warrants, but they have no expiry date. You can trade MINIs for indices and equities.

Unlike Exchange Traded Options, warrants are not standardises, which means you must be sure about the value and purpose of the warrants you are trading. For this reason, there are numerous other types of warrants to suit multiple purposes. You can speak to a stock broker about warrants, and all the usual trading methods are available with warrants.