A warrant is a bank-issued security whose value is determined by the value of the underlying investment, such as an equity or equity index. A warrant gives you the right, but not the obligation, to buy or sell a certain equity at a predetermined price.
Warrants offer an economical way of entering an equity market without owning the underlying equity. Due to their leverage effects, warrants offer the possibility of a better return than that offered by the same size of equity investment.
Warrants can be traded on both rising and falling markets, for there are two types of warrant. With a call warrant, giving you the right to buy a specific underlying equity, you can benefit from a positive price view. On the other hand, with a put warrant, giving you the right to sell a specific underlying equity, you can benefit from a negative price view. In addition, you can use put warrants to hedge investments.
As your returns will depend on the performance of the underlying equity, warrants are best suited for active, independent investors who are dedicated followers of the performance of companies and investment markets. Warrants react very strongly to changes in the value of the underlying equity, and therefore their target returns and risk levels are high.
Due to the fact that warrants are complex and non-standardised instruments, we recommend them only for investors who have high risk tolerance and are fully familiar with their characteristics.