What is Instalment Warrant?

Essentially Instalment warrant can be summarised in one sentence, buy now and pay the rest later. As it name suggests, investors can pay in instalments - partially pay for a share now then pay the outstanding amount in another instalment late on.

The main feature of this strategy is that the investor can pay an initial outlay of 20-50 percent and receive all the benefits during the time period, namely all dividends and franking credits. They can also buy and sell their warrants just like ordinary shares.

This feature is called gearing. It enables investors to get the maximum output for a minimum outlay. If a share price shoots up, warrants lets you take advantage of the share at the fraction of a cost. Investors can also convert their shares into warrants, great for getting cash for other profitable investments. Investors also don't need to pay the final instalment, when their warrants expire they can choose a cash payment based on the set price, minus other instalments owed.

Money owned on the warrant is considered as a loan, and includes interest and a borrowing fee. The interest can be paid in advance for 12 months or the period of instalment – usually one to five years including tax benefits.

Investors can choose from plain, vanilla, self funding and rolling instalments. Self-funding instalments help repay loans by using dividends. Rolling instalments allows investors to reset their gearing level every 12 months.

Instalment warrant is one of the few gearing products allowed in self-managed super funds. Its helpful in creating diverse share investments and can be used in a dividend yield play strategy.