What is the difference between buying a warrant from a warrant issuer and buying it on the ASX? What are the pros and cons of each?
Buying a warrant from a warrant issuer is often referred to as purchasing through the primary market. Buying a warrant on the ASX is referred to as a secondary market purchase. There are pros and cons for each.
Costs of buying the warrant
The price of a warrant is often referred to as the first payment or first instalment. When buying a warrant through a warrant issuer, usually all the investor has to pay is the first payment. When buying a warrant on the ASX, investors must place the trade through their broker. The disadvantage of purchasing the warrants this way is that the broker may charge the investor brokerage in addition to paying the price of the warrant (ie the first payment).
Investors who buy a warrant directly from a warrant issuer are required to complete the application form in the issuer’s Product Disclosure Statement or other offer document. Each time an investor wants to purchase warrants, they need to complete a new application form. Documentation for buying warrants on the secondary market is relatively easier. Investors need to complete a Warrant Client Agreement Form provided by their broker before they start trading warrants. Once this form has been completed, investors may trade warrants continuously through that broker.
Depending on the warrant issuer, a primary market application may take 3 to 5 days to process. As a result investors who apply through the primary market have less control over the purchase price of the warrant and may be exposed to movements in the warrant price over the application period. Buying a warrant on the ASX gives the investor more control over the price they pay. Warrants can be traded on the ASX the same way as shares. This means investors can choose the exact time they buy the warrant, and they can choose from a market order or a limit order. Warrant issuers are obligated to ensure there is always a market for the warrants so that investors can buy or sell the warrants at any time in the secondary market.
Cash Extraction Strategy
The cash extraction strategy is a popular strategy used with instalment warrants. In this strategy, investors lodge shares they already hold with the warrant issuer, in return for receiving an equivalent number of instalment warrants plus a cash payment. Investors can then use this cash to diversify their portfolio or to increase the exposure of their existing share holding. This means that the investor has unlocked their equity without selling the shares and realising a capital gain. This strategy can only be used by applying to the warrant issuer through their Product Disclosure Statement or other offer document. Investors cannot implement this strategy in the secondary market.
While all investors have different taxation circumstances, some warrants may have different taxation implications depending on whether an investor buys a warrant on the primary market or secondary market. Most issuers will provide some general taxation guidelines in their Product Disclosure Document or other offer document.
By Matt Comyn, General Manager, CommSec
Disclaimer: The information in this article is general in nature and does not take into account any investor’s particular objectives, financial situation or needs. In consider its appropriateness, investors should read the relevant product disclosure statement and consult a financial adviser before making an investment decision.