Delivering warrant education to expand
THE KNOWLEDGE OF INVESTORS Overview Before an investor considers purchasing a warrant, he must like the company.
An investor who is interested in purchasing warrants must initially analyze the company. For a warrant to be interesting, the results of the analysis of the company must indicate that the company offers potential growth in earnings and is financially sound. If the investor likes the company and is convinced that the company offers potential, then the investor should consider the warrants.
The investor should then analyze the warrant. If the warrant has 2 or more years before it expires (our personal suggestion) and offers the investor potential leverage, then the warrant offers the investor more potential capital gains than the common stock. The investor should then purchase the warrant in preference to purchasing the common stock.
It is essential for the investor to realize that when he considers a warrant for purchase, he must select and analyze the company. If the investor does not believe that the company offers potential growth and/or that the sector in which the company operates in is not in a bull market or preparing for one; then there is no reason to be interested in a company’s warrant.
There is no reason to believe that the price of a warrant is going to rise without an increase in the price of the common stock; of which, the warrant is an option to buy. The investor chooses to purchase the warrant in lieu of the company stock of a company because he anticipates that the price of the warrant will rise more rapidly than the price of the common stock. The warrant then offers the investor a greater return than the common stock, that is, the warrant offers greater leverage. But such potential leverage requires that the price of the common stock will rise, and hence the company itself must have potential for growth.
Much of our information presented on our website comes from our collective knowledge of over 30 years of investing. However, we want to acknowledge some of the professionals whose writings during the 1960’s and 1970’s have endured and are as relevant in today’s markets as they were back then. We have taken the liberty in some cases to utilize their information for the purpose of explaining warrants to our readers.
Sidney Fried, RHM Associates and Herbert B. Mayo, Ph.D.