Derivative types: warrants

Warrants are not only for giving a policeman authority to arrest you. They're also a type of investment. In the dictionary, a warrant is described as a positive assurance of something, a guarantee or a security. So, is a warrant, in investment terms, ideal for you?

What is a warrant? Derivatives and minimising risk

Warrants offer price exposure in different commodities. You don't buy and sell the physical commodity - a warrant is what they call a derivative. They simply offer price exposure to the commodity, without the need for owning it.

Warrants cover a diversity of risk and return profiles, which generally fall into investment-style and trading-style products - or both.

Generally, investment-style warrants are longer dated and more sporadically traded. They have a lower risk/return and higher face value, as a rule of thumb. Attractions can include dividends or capital guarantees.

Trading-style warrants are usually "quickie" investments and are traded more frequently, in general. They have a higher risk/return and are suited to those looking to profit from the short-term movements in the finance world.

Types of warrants: Investment and trading styles

Investment-style warrants include:

• Installments, which have leveraged exposure to shares, baskets of shares or listed managed investments.
• Endowments, which are long-term and allow you to leverage or diversify your portfolio.
• Structured investment products, which are packaged to meet individual financial goals, and
• Non-leveraged gold warrant (PMG), a Perth Mint Gold product, which provides direct, non-leveraged exposure to gold.

Trading-style warrants include:

• Trading warrants, which allow you to gain a leveraged exposure to an underlying instrument in a rising or falling market and can also be used to manage risk on an investment portfolio, and

• Knock-out warrants, which are similar to trading warrants, but have a knock-out feature, which allow you to trade a rising or falling share price.