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Why Warrants ? -- Why Now ?
September 27,
2005
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.
This means we
as investors have the right to acquire the underlying stock at a
specific price (determined by the company) and expiring at a
specific date in the future. Warrants are usually issued by
companies in connection with a financial arrangement and/or
public offering and are a “kicker” to sweeten the deal. As
investors in warrants our objective is to only trade the
warrants with no intention of ever exercising them.
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.
Closing price
of the common stock (23-Sep-2005) C$9.30
Closing price
of the warrant (23-Sep-2005) C$1.55
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.
Cost of the
common stock (1,000 shares)
C$9,300
Cost of the
warrants
(1,000)
(C$1,550)
Your
savings
C$7,750
Now you control
1,000 shares and have saved a lot of money.
Not only do you
save money, if the common stock goes to say C$20 (a return of
115%), the warrant will be worth at least C$7.90 or a total of
C$7,900 on your investment of C$1,550, reflecting an incredible
return of 410%.
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.
September 27,
2005
Dudley Baker
Email:
info@preciousmetalswarrants.com
Website:
PreciousMetalsWarrants
Interested
in learning more about Warrants?
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 we
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, much more. We do not make any specific
recommendations in our service. We do the work for you and provide
you with the knowledge, trading tips and the confidence in placing
your orders.
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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.
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