With warrants to purchase, known as call warrants, investors set their hopes on the price of the underlying instrument rising; with warrants to sell, known as put warrants, on its falling. The underlying instrument may be, for example, a share, an index, a currency, a commodity or a bond. The leverage effect, also called the gearing of the warrant, essentially arises out of the considerably smaller amount of capital – as compared with a direct investment – that the investor needs to commit in order to speculate on price movements of the underlying instrument. Examples of the leverage effect of warrants can be found in the explanations of put and call warrants given under nos.1 and 2 below.
But the leverage effect may also come into play in the opposite direction, so that as a rule these papers are only suitable for investors who are willing to take risks.