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Covered Warrants (A short introduction)Covered warrants are a new financial product for private investors to play the stock market.
Warrants give you the right to buy/sell shares at a predetermined price within a fixed time period. In this they are similar to options. You aren't buying the share itself merely the right to buy the share at that price. Because hopefully the shares price will go higher than the price you have agreed to pay for it, the warrant (right to buy) at the lower price has an intrinsic value of it's own.
So when you buy a warrant you are paying for the right to: -
- Buy a specific number of companies shares
- Within a specific period of time
- At a specific (strike) price
With Covered warrants you can: -- Trade on margin
- Purchase 'call' warrants (Call = right to buy shares.)
- Purchase 'put' warrants (Put = right to sell shares.)
- Purchase warrants in indices
- Purchase warrants, which have expiry dates up to 5 years into the future.
Covered warrants are issued by third parties (merchant/investment banks etc). The issuers guarantee the liquidity and value of the warrants; they provide the financial stability necessary for warrants to be traded in a market, the issuers effectively acting as the market makers.
When the warrant matures or is exercised (called) you receive the profit of the strike price against the performance of the share minus transaction costs as cash, you don't actually receive the shares, which is good because there is less paperwork and no stamp duty.
There are two distinct types of covered warrant:
American style warrant
A warrant that can be exercised at any time up to expiry.
European style warrant
A warrant that can be exercised only on the expiry date
Remember you are buying a price, so if the share fails exceed the strike price of your warrant, it will be worthless. So the premium (i.e. the cost of the warrant) is at risk.
For a detailed break down of covered warrants read the Covered Warrants article by Alpesh Patel in the ADVFN help pages (click here)
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