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Endowment warrants

Q. What are endowment warrants and is it a good time to think about investing in these?  

A. In simple terms you pay a deposit — 30-65% — of a share’s current price and you are set to hold them for 10 years. The balance is charged interest, but this can be cancelled out over time by the dividends you receive and you can end up owning the shares outright with no debt. A successful company that increases its dividends is what a warrant buyer is looking for. If you don’t get lucky, you make a final payment or cash out the warrant. You would end up with the value of the shares minus any outstanding payment on the loan. By the way, along the way you can cash in the warrant, which again is based on the value of the shares and what is owed.

With these you want share prices to rise along with dividends and interest rates to remain on the low side. Note, you don’t pay capital gains tax until you sell the warrant and no tax or paperwork for 10 years.

Are they a good idea now? They are not for safe and conservative investors, however, for risk-takers a good dividend paying company with the share price way too low could be an interesting punt, but it comes with high risk. Some investors might have a very small exposure to an investment like this to ramp up returns with only a minimal chance of losses. Do your homework with these. 

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


Published on: Wednesday, November 11, 2009

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