Why trade them?

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.

Overview
Risks

There are two fundamental reasons why Covered Warrants could be considered a good tool for investing defensively in uncertain markets:

Limited losses

Covered Warrants have the ability to provide uncapped gains if markets move in your favour, but your losses are limited to the amount that you invested. This means that you can invest in confidence, knowing exactly what you could stand to lose.

Gearing

Covered Warrants may allow you to benefit from the effect of gearing. Gearing is nearly always considered an advantage for investors looking to obtain a much larger exposure for their money, thereby multiplying their prospective profit or loss. However, it can also be used for more conservative investments where you chose to ‘gear down’ and take an equivalent position at a lower cost, thereby reducing your capital at risk in comparison to buying the share, index or commodity.

A summary of advantages for Covered Warrants:

Gearing: The ability to make higher returns from a positive move in the markets. But remember that gearing can also magnify your losses.
Limited risk: You can not lose more than your initial investment
Flexibility: The opportunity to profit from both rising and falling markets
Simplicity: Warrants are traded in the same way as shares via a broker
Diversification: Access a wide range of assets, including equities, commodities, indices, foreign exchange and interest rates
Low entry: Very small minimum trading size
Assurance: Highly regulated and liquid market provided by the London Stock Exchange
Tax efficiency: Covered Warrants which are cash settled should not be subject to stamp duty but please contact your own tax advisor for details of how Covered Warrants will affect your tax situation.
No exchange rate risk: Selected Covered Warrants use a Quanto feature to fix the exchange rate on non-GBP denominated underlyings.

Read about the Risk

Risks to be aware of

The value of your investments may fall as well as rise. Covered Warrants are leveraged products that carry a high degree of risk and it is possible to lose your entire investment. These products may not be suitable for all investors, you should therefore ensure you fully understand the risks involved, and seek independent advice where necessary.

It is important to know that even though the amount you can lose is limited to the initial investment, gearing can magnify losses as well as potential returns. Also, because Covered Warrant contracts expire, you need to be aware that the time until expiry affects the price.

Like options, the value of a Covered Warrant prior to expiry is made up of two components. The first is the intrinsic value which is the amount by which the underlying asset exceeds the Strike Price of the Covered Warrant. The second is Time Value which refers to the amount by which the current price of the Covered Warrant exceeds the Intrinsic Value. The Time Value represents the price paid for the possibility of how deeply the warrant will finish in-the-money. As the Covered Warrant nears expiry the likelihood of ending in profit reduces and therefore the Time Value reduces.

In addition, you also need to be aware that if your expectation for a particular price move on an asset comes to fruition after the Covered Warrant has expired, you will not profit from that price move because the Covered Warrant contract is no longer valid.

Holders of Covered Warrants have credit risk to the RBS Group, which means that their investment is lost if RBS ceases to trade.

Covered Warrants on Emerging Markets: Investing in emerging markets involves certain risks and special considerations not typically associated with investing in other more established economies or securities markets. Investors should ensure that they understand the nature of all these risks before making a decision to invest.

Corporate actions: The Important fact to note is that the Strike Price and Payout Multiplier of a Covered Warrant may change over the course of the term due to the company issuing more shares, for example, in the case of single stocks or indices. Should this happen, you are not required to do anything. You will retain the same number of Covered Warrants, with the same economic exposure to the underlying.

Dividends: Covered Warrants may effectively discount the value of an anticipated dividend to maintain constant pricing when a stock trades ex-dividend. The holder of the Covered Warrant will not receive a dividend payment.