How do they work?

Before trading you should fully understand the nature of covered warrants and your exposure to the risk involved. The geared nature of covered warrants means that a relatively small movement in the share price of the underlying asset will result in larger movements in the value of the warrant. Therefore, covered warrants provide the opportunity for greater returns than ordinary share dealing but also greater risks and potential losses. If you are in any doubt you should consult an Independent Financial Advisor.

As all Covered Warrants are listed on the London Stock Exchange and traded through your share-dealing account, executing your strategy is easy. Each product has a London Stock Exchange code starting with an ‘R’ for example “R036”. Through your share dealing account you can gain quotes and conduct market transactions just as easily as buying and selling shares.

When you have purchased your warrant it is important to monitor it’s performance to determine the best course of action:

Exercise – if a warrant is performing well at any point in the investment term, you may wish to exercise your right to buy or sell the underlying asset. If no action is taken and the warrant is showing a profit on expiry, it will automatically exercise and the funds will be credited to you. If a warrant has made a loss on expiry your initial capital is lost.

Close out – you can close out your warrant position by selling it back to the market, capitalising on both time and intrinsic value. Your profit is determined by any potential difference between the purchase price and the sale.

Abandonment – If your intuition was wrong and your warrant is worthless on expiry, you can abandon your position and it will be automatically closed

How does taxation effect your investment?

Stamp duty - As Warrants are generally cash-settled, upon exercise of the warrant, cash changes hands but no shares. Therefore there is no stamp duty to pay.

Income tax - Holders of stock warrants have no entitlement to receive dividends from the underlying and as there is no income, there is no income tax levied on warrants.

Capital gains tax -Warrants are treated the same as shares. Tax laws can, of course, change.