Warrants

Warrants are tradable long term call options, which in more simple language means the holder has the right to buy a given number of shares in a company at a fixed price called the 'subscription price' at some future date - usually this date is several years ahead.

Like share options, a warrant gives you the right to buy shares at some predetermined date but the warrant holder is under no obligation to do so. Like options, warrants pay no interest or dividends and like options they have a substantial gearing effect.

Generally speaking, the price of warrants tend to move up and down in line with the price of the underlying shares to which they are related. Warrants are often issued with new share issues.

It is worth remembering that if the underlying shares fall substantially, the warrants are likely to be worthless.

For investors looking for higher than average returns and happy to take the extra risk, warrants can provide the answer. There are a number of collective investment funds which invest exclusively in warrants.

Ultimately, holders of warrants are hoping either to realise a gain, or eventually to buy the underlying shares on which they're based more cheaply than on the open market. If neither occurs, the warrants will eventually "expire" with no value.

Warrants are often issued by Investment Trust companies when they launch (usually one warrant is offered for every five shares bought).

Investment Trust companies tend to notify warrant holders of their rights shortly before every "exercise date", but you still have to work out for yourself whether it is worth exercising the warrants.

Several Investment Trust managers can supply explanatory information on warrants, and the Association of Investment Trust Companies (AITC) also has material available.

Trade online with Moneyextra Share Dealing now .

Last Updated: January 2006 © Moneyextra.com

MoneyExtra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.