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Delivering warrant education to expand
THE KNOWLEDGE OF INVESTORS

 

Basic definition of a warrant

A warrant is a security (like an option) giving the holder the right, but not the obligation, to purchase the underlying stock at a specific price, within a specified time period. In essence, a warrant is very similar to a long-term call option.

"There is no mystery as to why the warrant moves with the common stock.  To use a simple analogy, if you owned an option on a piece of property which gave you the right to buy that property for $5,000, and that option was transferable and could be sold by you at will, then the sale value of the option would be determined by the current value of the property.  If there were buyers willing to pay $10,000 for the property, your option to buy it for $5,000 must be worth at least $5,000, since the transaction could be completed on the spot and that is how much you would gain.  In addition, if you expected that a few more years would see the value of the property go up still further, you would place a value on that option considerable greater than $5,000, depending upon how optimistic you felt regarding he ultimate future worth of the property.

If the current market value of the property was only $1,000, your option to buy it at $5,000 would be worth much less than in the previous paragraph.  Yet, the possibility that at some time in the future the property might go up in value, would afford a certain value to the option, the exact valuation being determined again by how optimistic you or a possible buyer might feel about the future price of the property.

It is exactly the same with a warrant on a common stock."

    The above quoted text is from, 'The Speculative Merits of Common Stock   Warrants' by Sidney Fried written in 1949.

Warrants are usually issued by a company in connection with a private placement or a financing arrangement. Many of the warrants will remain privately held and will never trade in the open marketplace. Our service only covers warrants which are tradable on the exchanges either in the United States or Canada.

As an individual investor, your objective is usually to only trade the warrant, not to exercise the warrant and the warrants trade freely, just like the common stock.

Currently there are many warrants trading with expiration dates out to the year 2012 and though warrants expiring within, say, 2 years, may possess great upside leverage, also pose a greater risk. It is widely recommended for most investors to focus on Warrants with at least 2 years left before expiration date.

Example of a warrant:

Northern Orion wt A
Exercise Price – C$6.00
Expiration Date – 17-Feb-2010
Current price of warrant – C$1.83
Current price of common – C$6.43

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Using the above data, if you purchase one wt at a price of C$1.83 you now have the right to purchase one common share at C$6.00 until 17-Feb-2010.  This is the exact principle of call options and LEAPS.

The warrant intrinsic value is said to be C$.43 (current price of common C$6.43 – exercise price, C$6.00).  The additional premium of C$1.40 (current price of wt, C$1.83 – intrinsic value, C$.43) is the time value premium placed on the warrants by the markets.

Summary
An investor may purchase a warrant which is the option (the right) to purchase the common stock of a company.  He may prefer to purchase the warrant instead of the common stock because the warrant offers more potential gain, that is the warrant offers the investor leverage.
 

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Disclosure/Disclaimer Statement

PreciousMetalsWarrants.com is not an investment advisor and any reference to specific securities does not constitute a recommendation thereof.  Neither the information, nor the opinions expressed should be construed as a solicitation to buy any securities mentioned in this Service.  Examples given are only intended to make investors aware of the potential rewards of investing in Warrants.  Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions involving stocks or Warrants.