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Why Warrants ? -- Why Now ?
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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?
Our service provides you with the details on all mining company
warrants trading on the U.S. and Canadian Exchanges. Our website
is updated as new information is received and we alert you
via an E-Blast. We have recently revised our look and feel
and now provide much more information. Our greatly enhanced
Warrant Database provides you with links to the companies’
websites, links to quotes and charts, weekly prices of the
common and warrants, our own Warrant Leverage Calculator updated
each Friday for each company and much, much more.
Visit us soon, http://www.preciousmetalswarrants.com
“If you like the Precious Metals Stocks, you’ll
love the Warrants!”
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