Like spread betting, warrants
and options are financial tools that allow investors to benefit from
rising and falling share prices. They are particularly popular with
financial institutions.

Warrant

A warrant
is issued by a company and gives the holder the right to buy shares at
a particular time in the future at a price set in the present – the
exercise price. In the meantime they can be traded on the stock market.

The aim is for the exercise price to be cheaper than the future
price or projected market value. You can then sell the warrant for a
windfall
profit. But if the shares of the company never reach the exercise
price, then the warrants are worth nothing. The warrant’s value rises
when the share price rises.

Options

An option works in a similar way but is bought from a market-maker – a
professional buyer and seller of shares – rather than the company.
There are two kinds:

• A call option gives you the right to buy shares in a particular company at a fixed price within a set period.

• A put option gives you the right to sell shares in a particular company within a set period.

Traditional options last for three months and you can either buy or
sell the shares, or let the option lapse. There are also traded options
which can be bought and sold in their own right.

Remember that warrants and options are two of the riskiest forms of
investment and should be used only by those prepared for this.