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Why Warrants? - Why Now?Dudley Baker I started to title this article, "Warrants for Dummies", but I do not want to offend any of our readers. However, I have come to realize that many in the investment community, including many professionals, do not fully understand warrants and what they can do for you. Many appear to be "not interested" but I believe it is merely a lack of knowledge and understanding of what a warrant is and what place warrants can have in one's investment portfolio. So exactly what is a warrant? Most investors are familiar with options on stocks, calls and puts, right? I, like many of you, realize this is a very dangerous game for most investors. An option gives you the right, not the obligation, to acquire the underlying security/stock at a specific price and expiring at a specific date in the future. However, options are very short term, usually 30 - 90 days, so you have to be not only correct with respect to your timing but also with respect to the direction of the stock market. Perhaps you are a better market timer than I but it does not work out well for most investors. A warrant is very similar to
an option but with one major difference, TIME! Warrants
are usually issued with a minimum of 2 years to 5 years of life. Warrants are all about Leverage. Leverage is why an investor should be interested in warrants. If your favorite mining stock has a warrant trading you should take a serious look to see if they fit your investment criteria which means does how long does the warrant have until expiration and does it provide good leverage. It is not always easy to find all the facts on the warrants for some companies and you should always do your homework unless you allow us to do it for you in our service. What does leverage mean? Leverage means getting the maximum return with the least amount of your investment capital at risk. Without mentioning any specific names, let's illustrate why warrants can be very profitable. One large gold company trading on the TSX and the American Exchange has two warrants which trade on the TSX. The most recent warrant issued has an exercise price of C$12.10 and expires on 7-January-2008.
Say you were interested in buying 1,000 shares of the common stock which would cost you C$9,300. You could instead purchase 1,000 warrants at C$1.55 for a total cost of C$1,550.
Now you control 1,000 shares
and have saved a lot of money. What if, instead of buying 1,000 shares of the common stock you invested the entire amount in the warrants, you could actually purchase 6,000 warrants for the same total cost of C$9,300. Again, if we get a move in the common stock to C$20 (a 115% return), the warrants will be worth at least C$7.90 or a total of C$47,400 (6,000 wts @ C$7.90), for a return of 410%. This is not rocket science by any means; you just have to do the math. With spot Gold currently at $464.20 as I write this article, many analysts believe we have broken out and are looking for $500 gold by years-end for starters. There can be little doubt that eventually all mining shares will be in a rip roaring bull market. An investor should consider all the ways to participate in this bull market including adding warrants to their portfolio. All we ask is, "Why not attempt to maximize your investment returns? Of course, warrants do not come without some risk. If the underlying stock is trading below exercise price on the expiration date, the warrant will be worthless which is why we strongly recommend that investors focus on warrants that have a remaining life of at least 2 years. written Sep 27, 2005 Dudley Baker is the owner/editor of Precious Metals Warrants, a market data service which provides you with the details on all mining & energy companies with warrants trading on the U.S. and Canadian Exchanges. As new warrants are listed for trading they alert you via an e-mail blast. You are provided with links to the companies' websites, links to quotes and charts, tips for placing orders and much more. Precious Metals Warrants do not make any specific recommendations in their service. They do the work for you and provide you with the knowledge, trading tips and the confidence in placing your orders. For those investors seeking more knowledge on warrants do visit the Learning Center at Precious Metals Warrants, where you will find much more information and examples to enhance your learning experience. You may also sign up for The Warrant Report free weekly email. Disclaimer/Disclosure |
