INTRODUCTIONS TO WARRANTS
A warrant gives investors the right to buy or sell an underlying security within a certain time. The underlying instrument can either be a share, ETF or index. It provides a cheap way of getting exposure to a listed company without having to pay the full amount for the mother share.
The holder of a warrant will not have any voting or dividend rights as that enjoyed by shareholders. As such, you need to be mindful of the fact that as a warrant holder, you will not be entitled to have a say in the company’s management decisions.
Types of warrants
Company warrants which are issued by the listed company itself, where the investor is given the right but not the obligation to subscribe for new ordinary shares at a specified price during a specified period of time before the expiry of the warrant. Company warrants have a maturity date (up to 10 years) and are worthless after they expire unless the holder subscribes for the new shares before the maturity date.
Structured warrants are issued by third party financial institutions where the underlying could be the shares of a company, a basket of shares, an index or exchange traded fund.
Types of Structured Warrants
This gives the holder the right to buy the underlying share at a specified price within a limited period of time. Call warrants usually come with an expiry period of 6 months to 5 years with a fixed expiration date.
Put warrants gives the holder the right to sell the underlying share at a specified price within a limited period of time. As with call warrants, put warrants usually come with an expiry period of 6 months to 5 years with a fixed expiration date.
Callable Bull/Bear Certificates (CBBC)
CBBC tracks the performance of an underlying stock without requiring investors to pay the full price required to own the actual stock. They are issued either as Bull or Bear certificates with a fixed expiry date, allowing investors to take bullish or bearish positions on the underlying stock with the possibility of an early termination before the expiry date when the underlying moves in contrary direction to investor’s expectations.
CBBC comes with an expiry period of 3 months to 5 years. It is possible for early termination before the expiration date when the price/level of the underlying instrument reaches the ‘Call Price’.
General guide for investing in warrants
Make it a point to understand the features of the structured warrant and match it to your risk tolerance and financial goals.
Check the prospectus for:
- details on the issuer
- the structure and underlying assets
- the terms and condition of investing
- the strike price and conversion ratio
- The expiry date
- The risks attached to the warrant
Continue tracking the performance of a warrant as it is closely linked to the price movement of its underlying assets. As such, if you are expecting an uptrend market and have strong confidence in the underlying shares, then the chances of you reaping rewards from investing in warrants is very high. However, if the market is experiencing a downward trend and the time to maturity of your warrants is limited, then you should be more cautious in buying them. This is particularly crucial if the current market price of the underlying share is lower than the exercise price of the warrant. A more disciplined way of investing in warrants is to set a time limit for the underlying share to reach your targeted price. If the price does not measure up to your expectations by then, you will need to re-evaluate your position according to your risk/return profile.
The Malaysian Capital Market has an extensive range of investment products, all with varying degrees of risks and returns and catering to different types of investors. As a potential investor, always be mindful of your own risk appetite and investment goals and never invest in an investment product that you do not understand. Lastly, make only informed investment decisions by learning and understanding the products carefully first.