What is a warrant? What do investors need to know about warrants? Perhaps not everyone knows this term, especially those who have never invested in securities or are in the process of learning about securities.
What is a warrant? Features of warrants in Vietnam
A warrant is a type of security that gives the holder the right to buy the common stock of an issuer at a fixed price (known as a predetermined or strike price) until the expiration date.
Warrants are financial instruments in the form of contracts that give the holder special rights to buy securities, warrants are usually tied to bonds or preferred stocks.
In short, when an investor has a warrant, he or she is free to purchase the company’s shares at a predetermined price without being affected by changes in the market, the company’s value, or other factors.
In Vietnam, covered warrants are the most accessible to investors. A covered warrant is a type of security with secured assets issued by a securities company, listed on the stock exchange, with its own trading code and similar trading activities to the underlying securities.
When holding a covered warrant, the holder has the right to buy or sell the underlying security to the issuer of the warrant at a predetermined price, at or before a specified time or receive the difference between the underlying security’s price and the underlying strike price at the time of exercise.
A warrant has the following features:
- Issued by the parent company;
- Operating with the purpose of raising capital for business objectives and business activities;
- Corporate warrants only include shares issued by enterprises.
And covered warrants:
- Listed and traded on the stock exchange like a stock;
- The State Securities Commission will be responsible for granting operating licenses to financial institutions that are entitled to issue warrants.
- Issued with the purpose of adding more types of investment, and helping securities companies increase profits from selling warrants.
Classification of warrants in Vietnam
There are now two different types of warrants: Call warrants and Put warrants.
Call warrants: A type of warrant that allows an investor to buy an amount of the underlying security or receive an increased difference when the underlying security’s price at expiration is higher than the pre-determined price.
Put warrants: A type of warrant that allows an investor to sell an amount of the underlying security at the current price or receive the difference when the expiration date is lower than the pre-determined price.
What you should know before investing in warrants
It is essential to thoroughly expand knowledge on subjects such as how to calculate the warrant price when to decide the warrant price, and the factors impacting the warrant price in order to successfully invest in warrants.
The warrant price is one of the issues that investors are particularly interested in. Therefore, before investing in warrants, it is necessary to find out what factors will affect the price of warrants.
Maturity: Is the term value of the warrant, the longer the maturity, the higher the warrant value.
Price volatility of the underlying security: The degree of price fluctuation of the underlying security. Accordingly, if the underlying security has a higher price fluctuation range, the higher the investor’s ability to generate profits, the higher the warrant’s price.
Interest rates: The increase and decrease of interest rates also affect the determination of the warrant’s price. When interest rates rise, the investor’s income will be greater. Therefore, investors will pay more for call warrants and less for put warrants.
Investing in warrants has the following outstanding advantages:
- Investors do not need to make a deposit, this is also the difference when participating in warrant investment compared to investing in other derivative securities products.
- High liquidity: Warrants are issued on the HOSE stock exchange, and the product is guaranteed high liquidity by the issuing company.
- Relatively low investment capital: Because the warrant price issued by companies is very low, much lower than the current underlying securities price on the market, to invest in warrants, players only need a small amount of capital.
- Definable loss: A investor who invests in warrants can determine the maximum risk of loss which is only the initial warrant purchase fee.
Risks when investing in warrants
- The volatility of the underlying security is unpredictable, which will affect the chance of a warrant investment making a profit or a loss. Owners still have the risk of loss when buying warrants, the loss is equal to the original purchase price.
- Due to high leverage, if the underlying price movement goes against the original predicted price, the loss rate will increase according to the leverage ratio.
- Warrants have a relatively short-term value, up to 24 months. This is a major limitation when investing in warrant products, so it can be said that this is not a long-term sustainable profitable investment option for investors.