How to Trade Warrants

Overview:

Most of the warrants trading today on the commodity and natural resource shares are on Canadian companies and thus it is necessary to have a basic knowledge of the benefits and limitations thereon.

An original issue of Canadian securities cannot be sold in the United States unless they are registered with the Securities and Exchange Commission.  This means that an American cannot buy Canadian securities when they are newly issued.  He can buy them after they are issued and are traded, but he cannot buy the new issue that contained the warrants (unless they are registered with the SEC).

Secondly, a United States citizen cannot exercise the Canadian warrant. If he exercised the warrant, he would receive a newly issued share and unless those shares have been registered with the SEC he cannot legally purchase them.

Again, not a problem, as we personally see no reason for an individual investor to ever exercise a warrant.

Now, let's cover more of the basic issues:

1. Symbols

     Warrants trade exactly like the underlying common stock and they are assigned a symbol
       for trading.

     Canadian investors:

          As most of the warrants are on Canadian companies, you will have find it very easy
          to execute your orders with the Canadian symbol which we furnish in our database.

       U.S. investors:

.       Approximately 50% of the warrants in our database have an assigned OTC symbol.  For
        all of the warrants, we provide the CUSIP number (the legal identification for each security)
        in our database which eliminates any issues from your brokerage firm as to the correct
        symbol for them to use for a specific warrant to place your order.

2. Exercising Warrants

We personally see no reason for an individual investor to ever exercise a warrant.

When the warrant has met your financial objective, you just sell the warrant as you would the common stock.  You can sell the warrants anytime you want and do not have to hold to the expiration date (as a few investors erroneously believe). 

Many of the shares of the Canadian companies have not been registered in the United States.  The same goes for the warrants other than a few which are trading on the U.S. exchanges.  This is important to understand in that U.S. investors can generally not exercise the warrants as they are not registered in the United States.

Please note the difference; United States investors can purchase the warrants but are generally not allowed to exercise them.  Not a problem. Remember, our belief and rule is that it is never advisable for investors to exercise the warrants anyway, whether you are a Canadian citizen, U.S. citizen, etc.  You just sell them when your investment target has been reached.


3. Expiration Date - Be Aware

This is very important, so read carefully.  If your warrants are "in the money", i.e. the common stock is trading above the exercise price of the warrants and the warrants are approaching the expiration date you must take some action.

Unlike, call options, which if "in the money" and the options expire, the value of the option is placed automatically into your brokerage account, right?  With warrants, this is not the case!!

You must sell your position before the expiration date, or you will receive nothing.  Also, if you hold warrants in a company and the company makes an offer for the warrants, via an early buy back, you must, must, must do something. 

The message here is to be alert as to the news, events and approaching expiration date of any warrants which you hold. 

Unless a company has a specific early call feature there would be no limitation on when you can sell up to the expiration date.
 

4. Prices of the Warrants and Markets

         Market Analysis:

              Determining bid and ask prices
              Charts
              Trading volume and history      

                    Included in our Warrant Database we have a link to 'Market Analysis' , this will
                    take you to the TSX where you get the bid-ask prices on the warrants, access to
                    charts and to the last 30 days of prices and volume.

         Limit Orders

                      Warrants, like many of the smaller Canadian mining stocks, may have very thin
                    markets and a big spread between the bid and ask prices.  We always
                    recommend you place only LIMIT ORDERS when buying or selling the warrants or
                    the Canadian mining stocks. 
 

5. Company Mergers or Buyouts

       What happens to warrants if the company is taken over or merges?

The warrant holders are usually treated well in a takeover situation.  Some recent examples, Yamana Gold bought out Desert Sun on a stock for stock exchange and the old Desert Sun warrants are now traded as Yamana Gold warrants with the same expiration date.  Another example was the buyout of Bolivar Gold was for cash and the warrants holders were treated well, even thought some of the warrants were still 'out of the money'.

Recent history is teaching us that when a merger is announced and the company being acquired is consenting to the deal and the terms are a stock exchange as opposed to a cash buyout that investors should best sell their warrants at the prevailing market price. Our rationale is that if management has consented to the deal this will usually prevent any other suitors.  Also, these deals take months to actually close and your investment dollars are basically dead money during this long process.
 
In a stock exchange arrangement, the warrants will continue on as warrants of the acquiring company with the same expiration date and with the exercise terms adjusted to reflect the terms of the stock exchange in the merger. 


6. Brokerage Firms

        Canadian investors: 

             As there are symbols for all the Canadian warrants, your placing of orders should be
             very easy and we would think you can use your online brokerage firm as the symbols
             are clearing established for these warrants.

         United States investors:

Allow us to preface our remarks on this subject as to not offend any readers and any of our subscribers whom are brokers as here we are speaking frankly from personal experience and from feedback from some subscribers.

At least 90% of all of the warrants are on Canadian companies and approximately 50% of the warrants have been assigned an OTC symbol to facilitate trading in the U.S.  An important tool we include for investors is the CUSIP number for each warrant which is the legal identifier. It may be necessary for you to call your broker to place these orders.  Some of the online brokers may not be setup with the symbols for these warrants to facilitate the trades, so a call may be necessary to enter the order and the broker will usually have to call their back office/clearing firm to get the correct symbol for placing the order.  The most important thing to do first is to give your broker the CUSIP number for the warrant you wish to purchase.

In our Subscriber Section, we instruct you “exactly” what to tell your broker when placing your order.  If you find your current broker will not cooperate with you on placing the orders for warrants or perhaps their commissions are very high, we suggest you contact NetVest.

We have used this discount broker for over 20 years and their MAXIMUM commission on the warrants is $29, whether you buy 100 or 100,000.  We have no financial interest in this company other than being a satisfied customer for many years.