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Why Warrants? Why Now? (Part 2)Dudley Baker Our original article was published on September 27, 2005 and with the recent explosion in the mining stocks and warrants we thought it timely to revisit our original article as many new investors are now becoming aware of the precious metals stocks and their potential with the news that gold has broken into 25 years highs. We realize each day that many investors, the investment community and many, if not all of the investment newsletters and analysis are not educated on the subject of warrants. Therefore, our mission, so to speak, has become one of educating the world on this exciting investment vehicle through our articles. More background on investing in the precious metals stocks and/or warrants for U.S. investors: A substantial number of the precious metals stocks and warrants are Canadian based companies and therefore an investment therein by U.S. investors has yielded (and we believe will continue to yield) gains on two fronts, as a "Currency Play" on the U.S. Dollar and also the capital gain potential on the rise in the price of the stocks or warrants. Remember, when you invest in the Canadian stocks or warrants, you are now making an investment out of the U.S. Dollar and into the Canadian Dollar. The Canadian Dollar has recently proven to be one of the strongest currencies in the world, perhaps due to the large natural resources in Canadian both in the commodity sector and in the energy sector.   We understand that many U.S. investors are not aware of the implications (as yet) as to the effects of the value of the U.S. Dollar on their investments. For those investors living outside of the United States, the "Currency Effect" is very simple. These investors deal with currency translations on a daily basis and seem to have a better grasp and understanding of the "Currency Effect" on their investment decisions. It is important for all investors to understand this concept and the effects the currency in which you are invested will affect your investment outcome. Now let us get back to our main subject, Why Warrants? - Why Now? 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 "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 but you should always do your homework. 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.
Say you were interested in buying 1,000 shares of the common stock which would cost you C$12,500. You could instead purchase 1,000 warrants at C$3.74 for a total cost of C$3,740.
Now you control the same 1,000
shares and have saved a lot of money. This means will make 2.45 times MORE by investing in the warrants of this company. What if, instead of buying 1,000 shares of the common stock you invested the entire amount in the warrants; you could actually purchase 3,342 warrants for the same total cost of C$12,500. Again, if we get a move in the common stock to C$25 (a 100% return), the warrants will be worth at least C$12.90 or a total of C$43,111 (3,342 wts @ C$12.90), for a return of 245%. The same leverage as above of 2.45:1. This is not rocket science by any means; you just have to do the math. With spot Gold currently at
$554.00 as I write this article, many analysts believe we have
broken out and are looking for $600 - $900 gold by years-end.
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 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. January 18, 2006 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 |
