Several years ago in New York at a Hard Assets Investment Conference, a newsletter writer with over 30 years in the business, asked me, “Dudley, what is a stock warrant?”
After regaining my composure, I responded just like I am addressing you, by defining a warrant and why you should be interested.
By definition, a warrant is a security, issued by a company, giving the holder the right, but not the obligation, to acquire the underlying shares, at a specific price and expiring on a specific date in the future.
This definition is very similar to stock options or LEAPS, (Long-Term Equity Anticipation Securities) except that warrants are actually issued by a company, whereas options and LEAPS are created/written by investors.
Warrants are traditionally issued in connection with a company’s private placement or equity offering as additional incentive to get the deal done.
Warrants are mostly a matter of common sense and arithmetic, so let’s not make this complicated.
Obviously, the longer the term of the warrant (time until expiration) the better your chances of great success.
However, just because a stock warrant has a 5 year life does not mean that you must hold the warrant for 5 years. With trading warrants you can buy the warrants one day and sell them the next day.
Exercising a warrant should never be one of your considerations, as it makes no sense to me.
Exercising a warrant means you (or your brokerage firm) sends the warrant certificate to the company along with the exercise price of the warrants and you then receive the common shares deposited into your account. If the warrants are trading you will have accomplished nothing other than paying a higher price for the shares.
When you want to sell the warrants just sell. If you continue to like the common shares, then just buy the common shares after you sell your warrants. You will be dollars ahead with much less paperwork.
If you would like more information on stock warrants visit my website.
Dudley Pierce Baker
Editor – Founder