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Advantages and Risks to buying warrants

• Advantages
• Risks

Advantages

1. Low cost
   Warrants are an alternative to buying the underlying share that cost a fraction of the price of the shares. Brokerage costs that result from trading the warrants are also correspondingly reduced.



2. Sensitivity to share price movements
   In percentage terms, prices of warrants are more sensitive to changing market conditions as compared to their underlying shares. This implies that warrants can give the investor greater exposure to share price movements at lower the cost.



3. Limited downside
   The potential loss to the investor of warrants is the warrant premium, which is usually a fraction of the cost of investing in the underlying shares. The upside on the other hand, is unlimited.



4. Hedge against ailing market conditions
   Put warrants allow investors to hedge against any fall in the price of the underlying share within their portfolio.

Risks

1. Buying a warrant is expressing a directional view on the underlying share. If the investor's view on the price movement is wrong, the maximum loss to the investor is loss of the warrant premium.



2. Depending on the gearing effect of the warrant, the price of warrants is more sensitive to changes in market conditions than the price of the underlying share. In adverse market conditions, this could potentially result in a greater percentage loss (in the case of call warrants) or gain (in the case of put warrants) to the investor.