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If you don’t understand stock warrants, you are not alone. Very few of the 
professional newsletter writers and analysts understand them so why should you? Allow me to give you a brief education on stock warrants in the following paragraphs and tell you exactly why you need this information.
The comments above and below are excerpts from an article by CommonStockWarrants.com entitled Understanding Stock Warrants which have been enhanced – edited ([ ]) and abridged (…) – by munKNEE.com (Your Key to Making Money!)
to provide you with a faster & easier read. Register to receive our bi-weekly Market Intelligence Report newsletter (see sample here , sign up in top right hand corner.)
Did you know that warrants have been in existence and trading for many decades but very few investors know about them? Why? 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.
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.”
Sidney Fried, ‘The Speculative Merits of Common Stock Warrants’, 1949.
Did you get that? 1949. As stated in the above opening paragraph, the public and professionals 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.
Currently there are approximately 200 stock warrants trading on the NYSE, OTC, Toronto Exchange and Toronto Venture Exchange. There are stock warrants trading on virtually all industries and sectors, i.e., resource companies, financial services, gaming, autos, banking, biotechnology, restaurants, etc.
Approximately one-third of the stock warrants trading in today’s markets are on the common shares of the natural resource and commodities companies. As we are still in a bull market in this sector (believe it or not), investors are constantly looking for new ways to invest with the potential for great gains. Th0se…companies with warrants trading give investors exposure to gold, silver, uranium, zinc, copper, cobalt, platinum, oil & gas, etc.
Stock warrants are but one of the many vehicles to consider along with gold bullion, gold coins, ETF’s, mutual funds, options, LEAPS and common shares of the mining companies.
What are Warrants?
A warrant is a security (similar to a call option) giving the holder the right, but not the obligation, to purchase the underlying stock at a specific price and expiring on a specified date in the future. Sounds very much like a call option or LEAP, doesn’t it?
Stock 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 but those that trade are the focus of our attention.
Why Invest In Warrants?
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 possibility of such leverage the investor would buy the common stock. A good rule of thumb is to seek out those stock warrants having the potential to greatly outperform the shares with a desired leverage of 2 to 1 or better.
Currently there are many warrants trading with expiration dates out to 2020 and beyond and though warrants expiring within, say, two years, may possess great upside leverage and potential for gains, they also pose a greater risk. Therefore, we personally suggest that investor’s focus their attention on those warrants that have a remaining life of at least two years before their expiration.
As with any investment each investor must decide how much of one’s 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), an allocation of 10% to 15% maximum of your portfolio would be a reasonable allocation of your total dollars to this investment vehicle.
To summarize, investors may:
- wish to purchase a stock warrant that is the option (the right) to purchase the common stock of a company.
- 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% – 15% and buying long-term warrants on some of your favorite shares, you are now in the position to capture some incredible potential gains as this bull market in the natural resource and commodity sectors reasserts itself over the next two to three years.
For those investors seeking more knowledge on warrants we invite you to sign up for our free emails and visit our Learning Center where we provide you much more information and examples to enhance your learning experience.
Related Articles:
1. Warrants “Don’t Get No Respect” But They Should – Here’s Why
This article offers a tutorial on warrants as an underused investment vehicle, disabuses myths about warrants, shares the names of some warrants that warrant attention and makes the case for adding warrants to one’s portfolio.
2. My Rules for Successful Investing In Stock Warrants
Very few investors know about the potential benefits via the additional leverage that warrants can offer but they are substantial if you follow the 4 rules I present in the article below.
3. What Are Warrants, Options & LEAPS?
Investors are always looking for ways to maximize their gains and warrants, options and LEAPS are a good way to do just that. These investment vehicles are very similar to each other except for issue of time. [Let me explain.]
4. Increase Your Returns With Certain Gold Mining Company Warrants – Here’s How
The warrant investor needs to be aware that owning the stock outright is the conservative approach. When using the warrant, the basic common stock MUST appreciate to a certain level BEFORE the warrant’s risk/reward basis becomes better than an outright stock purchase…
5. Interested in Buying Gold or Silver Mining Company Warrants? Here’s How
Buying and selling warrants associated with commodity-related companies (including those of gold and silver miners) can be very confusing if you are not aware of the unique information required to do so and understand just how to go about it. Below you will find all the information you need to know on the subject.
6. Gold & Silver Warrants: An Insider’s Insights
With a tsunami of interest in the future prospects of gold and silver mining companies (and their stock prices as a result) I have been asked to publish an updated version of my one-of-a-kind proprietary index of commodity-related companies with long-term warrants (CCWI) and its sub-category of just gold and silver companies with long-term warrants (GSWI). This article gives you some insights into the ‘secret world’ of warrants and slices and dices the make-up of both indices identifying the constituents of each for your edification.
7. Gold & Silver Warrants: What are They? Why Own Them? How are They Bought & Sold?
With all the interest in physical gold, silver and other commodities these days, and the large/mid-cap companies who mine the metals and the juniors who are exploring for them, it begs the question: “Why is no one writing about the merits of investing in the long-term warrants associated with a few of those companies?” Merits? Absolutely! Here is a primer on virtually all that you need to know about warrants and how to invest in them for major profits.
8. Gold Bugs: Here’s How to Make the Most of the Continuing Bull Market in Gold!
All you gold bugs out there (and budding gold bugs too!) should find this article of extreme interest. With gold about to make a major move upwards in price NOW is the time to position your gold-investment allocation to maximize your dollars deployed and returns generated. Those in the know will not be investing in physical or paper gold, or even the stocks of the miners, but in the long-term warrants of the very few mining companies that offer such an opportunity. This article provides a primer on the MAJOR advantage that long-term warrants have in a market upleg and identify the specific warrants that are available.