Why Invest in Warrants
From Financial Literacy Wiki
There are two reasons why we should invest in Warrants.
Gearing Effect
The biggest advantage of warrant trading over stock trading is the gearing effect, the leverage, meaning one can make huge gains with from a modest investment capital.
For example, it can costs nearly $20,000 to purchase a lot of UOB shares. An increase of 1 percent in the UOB shares will give a return of $200. But if one were to buy a UOB warrant with an effective gearing of 10 times, it should return the same profit of $200, assuming equal transaction costs.
But to purchase the warrants would costs might just cost $2000 which effectively give you a higher return.
In conclusion, if the share price moves in your favor, you will get a higher return with a higher level of gearing.
This would potentially free up investors cash for other purpose.
Hedging Effect
Buying a put warrant is like buying an insurance for your portfolio, as it protects you from the falls of the market. Because if the underlying asset's price falls, the price of the put warrants should appreciate to offset losses suffered.
Vice versa for a call warrant and the rise in underlying stock price. Thus one can use warrants for balancing a portfolio's risk profile.
