Should Investors Use Warrants
for Leverage in 2008?
Dudley Baker
PreciousMetalsWarrants
Jan 8, 2008
Are you still a non believer in this bull market in gold and
silver? What an awesome beginning to 2008 with a gain of over
$25 in the price of gold on the first day of trading for 2008
and as I write this piece, [3 Jan] spot gold is at $859.00.. Probably even the talking
heads at the popular TV channels are getting excited and soon
we will have all investors joining 'our' party, and what a party
it will be.
We'll leave all the reasons and logic for this bull market
and the height to be reached to our peers in the business. However,
I do agree, that in time, gold will easily exceed $1,500
per oz. and much sooner than most of our friends and analysts
are forecasting.
The average investor is not yet aware of the concept of
investing in the mining sector. Also many readers are disappointed
in the performance of their junior mining shares to-date which
have lagged both the price of gold and the popular gold indices
and we expect this to change very soon with the juniors
gaining ground.
So have you positioned yourself wisely to maximize your
gains as this bull rolls on? Probably Not.
Believing in the long-term bull market in the precious metals
sector, investors are encouraged to seek out those investments
which will achieve the maximum return on their investment dollars.
So, let's discuss briefly some of your choices for deploying
your capital:
Gold coins, bullion or a goldmoney
acount
Exchange Traded Funds - ETFs
Mutual Funds - those specializing in the precious metals
Shares of large capitalization mining companies
Shares of junior mining companies
Options or Leaps which trade on the Chicago Board of Option Exchange
(www.cboe.com) on your favorite
mining shares
Warrants - specifically long-term warrants trading on some of
your favorite mining shares
Most of the above investment
alternatives are familiar to those of you visiting this website.
Warrants, however, are frequently overlooked by
90% of investors. This is only due to a lack of knowledge
and understanding.
Warrants
Realizing that many readers are familiar with options and perhaps
leaps let's start by distinguishing the differences in
these investment vehicles.
Options and leaps give the investor the right but not the obligation
to acquire the underlying security at a specific price and expiring
on a specific date in the future. While options usually have
a short-term life of 30 days to 180 days, leaps may have a life
of up to 2 years. Options and leaps are created/written by other
investors and no benefit accrues to the underlying company.
Warrants on the other hand are offered by a company, usually
in connection with a financial arrangement or new issue of shares.
Historically, warrants are very common in the mining sector and
the warrants are viewed as a means of an additional incentive
or an 'equity kicker' to get the deal done. The holder of warrants,
very similar to options and leaps, has the right, but not the
obligation, to acquire the underlying shares at a specific price
and expiring on a specific date in the future.
When an investor or even an analyst in our business says,
"warrants are just not for me," it drives me crazy.
When I inquire, "what do you mean warrants are not for you?"
they say they are too risky, or that they are not a speculator,
yada, yada, yada. (I personally consider myself an investor not
a speculator and normally hold my positions for well over a year.)
What if the warrants are long-term having a remaining life of
over 2 years? (Many of the warrants now are being issued with
a 5 year life.) And what if long-term warrants are trading on
one or more of your favorite mining companies? If you believe
in this long term bull market and you are purchasing shares in
a mining company, due diligence suggests that you inquire or
know if that specific mining company or energy company has long-term
warrants trading.
Frankly, we believe that long-term warrants should be included
in all investors' portfolios. For example, if a mining
company is selling at $10 and the warrant is trading at $2, and
if you want to own or control 1,000 shares, purchasing 1,000
shares would cost you $10,000, so instead you purchase 1,000
warrants for $2,000 and you will have basically the same position
(controlling 1,000 shares) with fewer dollars at risk while still
having the great potential gains as the share price rises in
the bull market. Bottom line is that you can control your level
of risk by increasing or decreasing your dollar exposure to specific
warrants.
Leverage
The essence of leverage is that the anticipated
gain on the warrant must be greater than the anticipated gain
on the common stock. This more rapid growth in the value of the
warrant relative to the common stock is called leverage. We encourage
investors to seek out those warrants, first, that are trading
on their favorite companies and second, those that have the longest
remaining life until expiration and which have great upside leverage
of 2 to 1 or better. This means that investors will potentially
make twice as much, 2 to 1, from the increase in the value of
the warrants as opposed to the common shares of the company.
To summarize, investors today have many choices and methods for
participating in this bull market. Warrants are but one of those
many choices, albeit, my personal favorite, because of the leverage
opportunities.
I would encourage those of you who are long-term investors
to carefully select the shares or long-term warrants of your
favorite companies and accumulate them at these bargain prices,
now.
Do visit PreciousMetalsWarrants
where you will find much more information and education on warrants
in our Learning Center and you can signup for our Free weekly
email, The Warrant Report.
Jan 3. 2008
Dudley Baker
Guadalajara/Ajijic, Mexico
email: info@preciousmetalswarrants.com
website: www.preciousmetalswarrants.com
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 they 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 more. Precious Metals
Warrants do not make any specific recommendations in their
service. They do the work for you and provide you with the knowledge,
trading tips and the confidence in placing your orders.
For those investors
seeking more knowledge on warrants do visit the Learning
Center
at Precious Metals Warrants, where you will find much more information
and examples to enhance your learning experience. You may also
sign up for The
Warrant Report
free weekly email.
Disclaimer/Disclosure
PreciousMetalsWarrants.com
is not an investment advisor and any reference to specific securities
does not constitute a recommendation thereof. The opinions expressed
in this report 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.
321gold
Ltd
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