Money: Warranting closer attention
Nic Cicutti on how higher risks can pay
Saturday 14 June 1997
Few investments carry more of a risk warning than warrants, which are available on the shares of trading companies and of investment trusts. More than pounds 600m is invested in a range of more than 150 warrants on offer from investment trusts alone.
A "warrant" is the option to buy a share at a future price, fixed at the outset and called the "exercise price".
The option may be taken up either on a particular date or a set of dates. This can take place each year up to a final date, after which the option lapses.
An investor makes a profit if the exercise price of the share at the relevant date, plus the cost of the warrant itself at the time it was first bought, jointly add up to less than the current market value of the share.
If the exercise price is higher than the existing market price of the share, the warrant does not have to be bought. However, if every exercise date is passed on without the exercise price being paid, the warrant lapses, leaving the investor out of pocket.
The aim is to choose a warrant that is cheap when it is first bought, with a low exercise price. Warrants are traded on the Stock Exchange and because they are bought as investments in their own right, they can vary in price over time.
Prices of warrants are lower than those of the shares they are linked with, but they do reflect the underlying share price. In effect, investors can achieve the same exposure to a share, and its potential upside, for a fraction of the price.
If, say, a share is priced at 200p and rises to 250p, investors are sitting on a 25 per cent gain. If the warrant was priced at 50p, that same rise in the share's value might translate into a 100 per cent gain. Equally, there is far more of a risk element. The same fall in the value of a share will impact far more on a warrant.
Investment experts call this phenomenon "gearing", which is measured as the share price divided by the warrant price. Therefore, high gearing means high risk.
Warrant prices are also affected by extra considerations. These include the lifespan of the investment itself up to the final exercise date. The longer the remaining lifespan of a warrant, the more it will cost to buy because there will probably be several exercise dates - with the potential to generate a profit for the investor - before it lapses.
Another factor affecting potential profits is the "premium" at which a warrant is sold - this is the difference between the exercise price plus the cost of the warrant itself, compared to the current price of the underlying share. The higher the premium, the higher the element of risk may be.
One major area of choice for would-be warrant investors lies in investment trusts, where they have generated an average return of 21.55 per cent, against a 9.58 per cent average rise in investment trust share prices and gains of 9.46 per cent from the FTSE All Share index and 13.94 per cent from the MSCI World index.
However, warrant prices remain depressed, partly due to continuing worries over the outlook for the market.
Williams de Broe, the stockbroking firm, points out that for investors worried about the potential of a downswing in UK stocks many investment trusts show a strong bias towards international markets and smaller company sectors, with emerging markets taking up pounds 160m of the pounds 600m market and European sector warrants a further pounds 102m.
Many investment trusts now carry no premium, in some cases even a discount to their underlying share price, making it unprofitable to exercise the right to buy. Equally, investors can buy "geared" exposure at less than the value of the underlying investment trust's assets.
Clearly, there are opportunities for canny speculators, although any choices need to be carefully made. For most savers, this will not be an area in which they will want to risk their shirt.
However, for those with the majority of their assets in unit and investment trusts, who have also invested in far safer Tessas and similar funds, a small warrant punt is an option.
As in all such cases talking to a good investment adviser is critical. The wrong decision could mean losing a lot more than with traditional investments. Getting things right, on the other hand, could leave you quids in.
13 September 2014 12:00 AM
30 August 2014 12:00 AM
05 September 2014 11:30 PM
30 August 2014 12:00 AM
The UK has slipped to 11th in the latest European league table of savers. Rob Griffin checks out the best options
22 August 2014 10:30 PM
Caroline Flint, the shadow energy secretary, says a Labour government would create a new energy regulator
22 August 2014 10:30 PM
16 August 2014 12:00 AM
16 August 2014 12:00 AM
Mark Dampier: An infrastructure fund that builds returns by taking different roads
The HiFX guide to international money transfers
Simon Read: Timeshare owners accuse Macdonald Resorts of land grab
Five Questions: Changes to car tax discs
Donald MacInnes: Let's pretend Scotland won and now a salmon is running the country
- 1 Mario Balotelli: Staff at arson-hit Manchester Dogs' Home convinced Liverpool striker is behind five-figure donation
- 2 Friends 20th anniversary: Alison Jackson photographs reunited cast
- 3 A bottle of wine a day is not bad for you and abstaining is worse than drinking, scientist claims
- 4 The response to my Pizza Express review has been overwhelming, and taught me a lot about journalism
- 5 Free U2 album: How the most generous giveaway in music history turned into a PR disaster
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
Scottish independence referendum: A nation divided against itself
Scottish referendum results: Cross-party consensus collapses amid Tory-Labour spat on the 'English question'
Scottish independence: David Cameron is becoming the 'George Bush of Britain'
Russia freezes Ukraine into submission: Kiev admits country doesn't have enough fuel for winter
Scottish independence: The Queen breaks silence on referendum debate – as think tank warns of £14bn black hole if Scotland votes Yes
iJobs Money & Business
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...
£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...
Day In a Page
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize