WARRANTS are derivative securities which are, essentially, promises to buy underlying stocks at a pre-arranged price. They carry the right, but not the obligation, to buy stock at a fixed exercise price within a fixed time span known as the exercise period. They have a finite life and, if unexercised by the expiry date, warrants become worthless. Warrant holders, unlike shareholders, have no shareholders' rights. They do not have voting rights at meetings and can receive no dividends. When the market price of the underlying stock is above the warrant's exercise price, the warrant has a minimum value which could, theoretically, be extracted by buying the warrant, converting it and selling the stock. Usually, the market attributes a greater value to the warrant than the minimum value to take account of future price rise potential. This is called the premium and its level depends on the time remaining to the warrant's expiry, the volatility of the underlying stock price and the gearing or leverage provided by the warrant. Because they are designed to reflect the movement of the underlying shares, they are inherently more volatile than shares. They have become increasingly popular investments over the past decade. There were only about 20 warrants traded in Hong Kong in 1985, whereas there are hundreds available now. If all the warrants outstanding were exercised, the amount raised would total more than $12 billion, according to South China Securities. In the case of an ordinary warrant, the exercise money goes to the underlying company whose stock is involved. Covered warrants are a different and more controversial type of instrument. They differ from ordinary warrants in that they are issued by third parties, the issuer generally owns all the stock covered by the warrant and the issuer can elect to pay the cash equivalent of the underlying share's closing price rather than transfer the stock to the warrant holder. The stock exchange has formulated a set of specifications for the type of listed companies which can have covered warrants listed over their stock. The market capitalisation needs to be at least $10 billion, of which at least half must be in the hands of the public. There are about 32 listed companies which meet the exchange's criteria. The more volatile the underlying stock, the higher the premium on the warrant on the stock market. And, as the period remaining to the expiry deadline of the exercise period decreases, the leverage effect lessens.