|
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
__________________________
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.
.
. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
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.
|
