In this weekly series titled JUST ASK, we invite readers to send in questions on stock investing, and personal finance. We will ask an expert (or experts) to provide answers. Below is a question from a reader which is answered by Ernest Lim, a Chartered Financial Analyst and a Chartered Public Accountant.
Reader: On the Singapore Exchange, there are warrants issued by some companies, such as Tat Hong, and there are many covered warrants (CW) with complicated-looking names such as
STI 2900 DBeCW100301 and MIDAS MBL eCW100603.
What are the differences between covered warrants and warrants?
Please advise on the comparative benefits and costs and risks of each.
Which is a "better" investment instrument in terms of efficacy, efficiency and reward risk ratio?
Dear reader: Here is a comparison of the two types of warrants.
| Warrant | Covered warrant |
| Issued by company over its own shares | Issued by financial institutions |
| Less liquidity | More liquidity |
| One direction i.e. call warrant | Both call and put warrants |
| Usually one exercise price | Can be more than one exercise price |
| Lifespan typically measured in years | Lifespan of usually 6 – 12 months |
| New shares issued upon exercise |
No new shares issued upon exercise |
An example of company issued warrants is Tat Hong W130802. They were issued in 2008 and they mature on 2 Aug 2013 (which is about 3.5 years from now).
They are only one direction – they make money for you if they rise in value and/or the underlying Tat Hong shares rise in value.
Their exercise price is $2.50 and are very illiquid on the stock market. This is reflected in the fact that at the close of trade last Friday, there were 115 lots queuing to buy at $0.06 and 15 lots queuing to sell at $0.15.
An example of covered warrant is Genting for which there are various types of call and put warrants issued with different exercise prices, different maturity dates, and different liquidity by different issuers.
In my opinion, covered warrants offer more alternatives than warrants and I would view them more favorably over warrants.
The advantages and disadvantages of covered warrants:
Advantages |
Disadvantages |
| Flexibility – can long and short via call and put warrants | Issued by financial institutions, thus to pick the warrant issued by the right financial institution is key. |
| More liquidity than warrants | Time decay is a big issue for covered warrants as they typically have short life spans. |
| A variety of exercise prices where investors have more flexibility to strategize their investment decisions. | Trading perspective. Not for long term investing |
I would like to highlight that warrants and covered warrants both offer leverage which is a double-edged sword and investors can easily lose up to 100% of their investments in a short span of time.
In addition, warrants would be most profitable if one believes that he is correct both in terms of the investment choice as well as time.
For example, if I believe Tat Hong is a great stock and it is likely to surge in the next few days, then, its warrants are a good investment. However, if I believe Tat Hong is a good stock and should appreciate in one year’s time, then owning the underlying stock is likely to be a better alternative than owning a warrant.
Ernest Lim is an assistant treasury and investment manager. Prior to joining his present employer in 2009, he was with Legacy Capital Group Pte Ltd, a boutique asset management and private equity firm, as an investment manager since 2006. He received a Bachelor of Accountancy (Honours) from Nanyang Technological University in 2005. He is a Chartered Financial Analyst as well as a Certified Public Accountant Singapore.
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