Understanding Warrants
Did you know
that warrants have been in existence for many decades but very
few investors know about them? Why? Unfortunately, very few of
the professional newsletter writers and analysts understand them
so they do not write about them. Are warrants that difficult to
understand? Of course not; it’s just that one needs to take
some time to learn and understand this incredible investment
vehicle.
Have you
ever participated in a private placement of shares in your
favorite mining company? If you, so probably received some
warrants in this private placement and a good chance you did not
even understand what you received.
To put this
discussion in perspective, I would like to offer a quote from
the past,
"...Common stock warrants turn in the most spectacular
performance of any group of securities....the speculative
potentialities of common stock warrants are enormous....
With
potential profits and potential losses so great it is a source
of wonder that so little understanding of the nature of common
stock warrants exists not only among the investing 'public', who
might be forgiven this sin, but even among the many
'professionals' of the business upon whom the 'public' depends
for information and guidance."
By Sidney Fried, 'The Speculative Merits of Common Stock
Warrants', 1949.
Did you
get that? 1949. As we stated in the above opening paragraph,
the public and professionals of today are, for the most part,
not aware of the enormous profit potential of warrants and thus
absolutely nothing has changed since Sidney Fried's
comments in 1949.
In the
1960’s and 1970’s Sidney Fried had a service called, ‘The RHM
Warrant Survey’ to which many investors subscribed and which was
available only in hard copy. To the best of our knowledge, this
service stopped in the late ‘70’s or early 80’s and very little
information has been available since to investors, until
recently.
So let us
give you a brief introduction to warrants.
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. Sounds very much
like a call option or LEAP, doesn’t it? Very much so.
Actually
warrants are issued by a company usually in connection with a
private placement or a financing arrangement and many of the
warrants issued will remain privately held and will never trade
in the open marketplace.
Fortunately, there are many warrants that trade on the Toronto
Exchange and a few in the United States on the NYSE and the AMEX
and many others are traded in the U.S. OTC market with assigned
symbols. As an individual investor, your objective, in our
opinion, should be to trade the warrant, without an intention to
exercise the warrant.
Currently there are many warrants trading with expiration dates
out to the year 2012 (one out to 2017) and though warrants
expiring within, say, 2 years, may possess great upside leverage
and potential for gains, they also pose a greater risk.
Therefore, we personally suggest that investors focus their
attention on those warrants which have a remaining life of at
least 2 years before the expiration.
So, why the
interest in warrants? The owner of the warrant receives none of
the benefits of ownership of the common stock of a company. He
cannot vote, and he does not receive any cash dividends.
Therefore, why would an investor want to buy an option (warrant)
to buy something instead of buying the thing itself?
The essence
of the answer is that the anticipated gain on the warrant must
be greater than the anticipated gain on the common stock.
Leverage, or at least potential leverage, is the prime reason an
investor would be interested in warrants. This more rapid
growth in the value of the warrant relative to the common stock
is called leverage. Without this possibly of such leverage the
investor would buy the common stock.
As with any
investment you must decide how much of your portfolio to
allocate to different sectors, different shares, ETF’s, mutual
funds, gold bullion, etc.
Even though we personally view ‘long-term warrants’ as
investments (as opposed to speculation), we find an allocation
of 10% to 20% maximum of your portfolio as a reasonable
allocation of your total dollars to this investment vehicle.
To summarize, an investor may wish to 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. Using a
portfolio allocation of 10% - 20% and buying long-term warrants
on some of your favorite mining shares, you are now in the
position to capture some incredible potential gains in this bull
market in the natural resource and commodity sector.
For those
investors seeking more knowledge on warrants we invite you to
visit our
Learning Center at Precious Metals Warrants. We provide
you much more information and examples to enhance your learning
experience.
You may also signup for our free weekly email,
The Warrant Report.
And for those readers in the San Francisco area, we will be
providing a master workshop at the Hard Assets Investment
Conference (November 18th & 19th). Our
workshop is on the 19th at 7:30 – 8:00am.
Please check the conference schedule for more details.
November 14, 2007
Dudley Pierce Baker
Guadalajara/Ajijic, México
Email:
info@preciousmetalswarrants.com
Website:
PreciousMetalsWarrants
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.
Disclaimer/Disclosure Statement:
PreciousMetalsWarrants.com is not an investment advisor and any
reference to specific securities does not constitute a
recommendation thereof. The opinions expressed herein are the
express personal opinions of Dudley Baker. 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.
