Although the majority of investors are quite familiar with stocks, commodities and currency pairs, the topic of warrants is often overlooked. This is rather unfortunate, for these alternatives are able to provide some unique benefits that cannot be enjoyed when utilising other strategies. We will first define warrants in a basic sense before analysing their benefits, their potential drawbacks and a few concepts to keep in mind. Opening up a warrant position can be an excellent way to add another proverbial “string” to your current investment “bow”. Let us now take a closer look.
Warrants Defined: What You Need to Know
Warrants may be viewed as a provisional contract between the seller (the holding company) and the buyer (the stockbroker). As opposed to a CFD trade, warrants give the investor the OPTION to sell an asset at a certain price before this position expires. However, this is only an option. He or she may instead choose to honour the expiration period before liquidating the asset.
The Benefits of Warrants
Many professional sources (including the ASX itself) highlight that warrants are able to provide the trader with sizeable leverages. An investor can enjoy a substantial profit without having to become over-exposed to a certain position thanks to the mechanics of a warrant.
Warrants are able to cover a massive number of underlying assets. So, they can be an excellent means to diversify what could otherwise be termed a rather narrow portfolio. They can also be used in conjunction with other positions such as CFDs, Forex trades and commodities.
Risk aversion is another advantage worth mentioning. The highest amount that the holder of a warrant can lose is the amount that he or she put up for the warrant itself. This is also known as non-recourse within the investing world. Should the position turn negative, he or she can walk away as opposed to being dragged down with the price.
Potential Downsides
We should not fail to mention that there are some inherent risks associated with warrants. For example, leverages can just as easily slide into the red. Should this be the case, the investor could very well lose much more than he or she allocated into the position. This is the reason why leverages should only be attempted after experience has been gained.
Liquidity can also be a concern. Liquid warrants may be the result of a lack of buyers on the open market. Or, the agreed-upon buying price could be considerably low. This may hinder or even negate one’s potential profits.
Another concern revolves around the limited lifespan of a warrant. After they expire, the position can no longer be exercised. Movements that occur after this time period are therefore irrelevant. Furthermore, those who do not exercise their right to sell are likely to receive only a partial payment for the total value of the asset.
Putting it Together
Much like any financial instrument, there are both benefits and drawbacks to any warrant. One way to enjoy the best position possible is to employ the proprietary trading systems that are only offered by CMC Markets. Please have a further look through this website to learn more about warrants as well as to appreciate some of the benefits to be enjoyed.
