Some ITs issue warrants as well as ordinary shares, often giving them away free at the time the trust is launched, although you can also buy them.
Owners of warrants have the right to convert them into ordinary shares at a future date at a pre-determined price. They don't have to, but they can if they want to.
Why would someone buy a warrant? Mainly because they think the price of the ITs shares is going to rise, but rather than buying the actual shares, they leverage their money by paying a much smaller amount for a warrant.
Sounds good? It can be.
Example
Suppose an IT's shares are trading at £1.00 each:
£2.00 less £1.10 less £0.10 = £0.80.
In total he has reaped £40 profit after risking £5.00.
Easy! But it doesn't always work out like this.
If things had not gone so well for the IT and, after 10 months, the share price had actually dropped to £0.90, William's warrants would have been pretty worthless. No point in paying £1.10 for a share worth £0.90.
Click here for the share and warrant price movements of TR Property over five years.
The nearer a warrant gets to its final month of exercise, the more acute the holder's position becomes, because if the underlying share is trading below the exercise price, the holder has very little chance of selling the warrant on. Ultimately if a warrant holder is left holding the baby when the final month of exercise is reached, his loss is total - that is the amount he paid for the warrants is gone.
Warrants are high risk investments which can normally only be bought through a stockbroker and they should only be bought by experienced investors.
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