Warrants Investment - Investing in Warrants

This article discusses warrants investment - investing in warrants. A warrant is similar to an option in that it represents the right to purchase shares of stock at a specified price, the exercise price. However, while listed call options have a maximum life of nine months, most warrants last several years. Rights for perpetual warrants never expire.
How they work: Like stock options, warrants sell either above or below their exercise value.

Example of a premium-priced warrant: An oil company warrant, with a life of two years, sells at lOYs. That's a premium of nearly $3 over its exercise price of 71,4 . The price of the company's stock is currently 15 1,4. It could possibly double within two years. Therefore, some investors are willing to pay a premium to have the right to buy what could be a $30 stock at a much lower price.
Example of a discounted warrant: A mini-conglomerate company's warrants expire next May. They can be exercised at $90. However, the stock is priced at only $44 currently. So it is highly improbable it will ever be exercised. Therefore, the warrant is selling at a deep discount: 75 cents. It is essentially deemed worthless, unless the stock takes an incredible leap. See warrants for more information.
If the stock price remains the same: The warrant will go down in value as the expiration date nears. It becomes totally worthless, of course, after the expiration date.

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Warrants tend to be very volatile: Whichever way the stock moves, the warrants move in the same direction, but proportionally faster.
Advantages of warrants: Greater leverage.
You can control a larger number of shares of the stock with a significantly smaller amount of capital than if you bought shares outright. This is an additional reason for the premium placed on many warrants. Warrants also give you the opportunity to limit your losses. Since the price of the warrant is minimal, you don't have to commit as much cash. If the stock market plummets, the percentage loss on the warrants may be high, but the face value is low.

Disadvantages of warrants: There is a limited universe of warrants to choose from. Also, warrants are issued for the most part by companies with less than AAA ratings. Don't expect to build up a portfolio of blue-chip warrants.
Best buys in warrants: Companies with stock that has taken a sudden heavy plunge for unusual causes. The stock may be cheap for six months or a year, then surge back upon recovery. Key: Look at the stock's underlying book value. If the stock is selling well below book while other stocks in the same category are much higher, the stock price may correct itself, causing the warrant to rise even faster.

Source: Consumer Information Center

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