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What are instalment warrants?

My financial adviser wants me to invest in instalment warrants but they sound risky and exposed to the stock market. Could you explain what they are and should I be into them?

These are like a lay-by but with shares. A part-payment goes down on shares today and you pay later. You will have the benefits of ownership and can buy and sell their warrants just like ordinary shares. You outlay between 20 and 50 per cent but you do receive the dividends and the franking credits as long as you hold the warrant. So it does give you access to a share rise but with a lower exposure or initial outlay. Some people actually will convert a share into a warrant to unlock cash in their share portfolio.

The money owed — the cost of the shares minus the deposit — is effectively a loan and there is usually interest and a fee can be paid. And interest can be prepaid, which could be a tax benefit to some people.

When the warrants expire, you can opt to receive a cash payment based on the set exercise price, minus any instalment amounts owing. These instalment warrants are used in SMSFs.

Your biggest risk is that your shares could go down in value and you are left with a loan amount to pay. Make sure you are comfortable with this product but it can be a way to turbo charge your wealth building.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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.

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Published on: Sunday, November 27, 2011

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