Warrants and options
A warrant is issued by a company and gives the holder the right to buy shares at a particular time in the future at a price set in the present – the exercise price. In the meantime they can be traded on the stock market. Many investment trust shareholders have them as part of their portfolio.
The aim is for the exercise price to be cheaper than the future price or projected market value. You can then sell the warrant for a windfall profit. But if the shares of the company never reach the exercise price, then the warrants are worth nothing. The warrant’s value rises when the share price rises.
An option works in a similar way but is bought from a market-maker – a professional buyer and seller of shares – rather than the company. There are two kinds:
Traditional options last for three months and you can either buy or sell the shares, or let the option lapse. There are also traded options which can be bought and sold in their own right.
TIP: Warrants and options are two of the riskiest forms of investment and should be used only by those prepared for this.