I want to post the text bigpike, it is short. Simplistic, but basically correct:
Many investors are excited about the prospects of a rip-roaring bull market in the precious metals sector and are presented with a variety of investment vehicles with varying degrees of risk and leverage and advice on how to invest accordingly.
Investors frequently read about buying gold bullion, natural resource mutual funds, ETF’s, and mining shares. But another often overlooked investment vehicle that investors may wish to consider would be warrants, particularly long-term warrants on the mining shares.
Let’s briefly delve into warrants and also distinguish them from call options and Leaps. Calls and Leaps are created/written by other investors giving you the right, but not the obligation, to purchase the underlying security at a specific price and expiring on a specific date in the future. Call options usually have a life of 30 days, up to 1 year while Leaps may go out 2 years. Investors will find that there are not many calls or Leaps on mining shares and if so, the life of the call or leap is too short to play this bull market.
Warrants, on the other hand, are actually issued by the company, frequently in connection with an IPO or private placement. Some of the warrants issued will trade but most will remain privately held and never trade in the markets. Warrants also give the investor the right, but not the obligation, to purchase the underlying security at a specific price and expiring on a specific date in the future, sounding very much like call options and Leaps. However, warrants will trade much like a common stock and are purchased through your broker and may have a life of up to 5 years. Why do most investors lose with call options and Leaps? It is all about ‘time’. When the time runs out, i.e. the warrants expire before the price of the security has moved up, you lose your investment dollars. With warrants and specifically long-term warrants, which we would define as having a remaining life in excess of 2 years, time is now on your side.
Many new warrants have come to market in the last 6 months with a life of 5 years. If investors can find a 5 year warrant on their favorite mining companies, they can now relax and enjoy the ride of this bull market while also gaining the additional benefits of the leverage associated with the warrants.
Why should investors consider warrants? This can be summed up briefly as increased leverage and decreased risk. Investors should normally be looking for warrants which have the potential to generate a 2 to 1 leverage, meaning if the underlying common stock goes up 100% then the warrants will increase 200%. Also, by purchasing the warrants, you may control the same number of shares of the company (at a fraction of the price of the common shares) thus limiting your capital exposure and decreasing your risk.
For more information on warrants you may wish to visit www.PreciousMetalsWarrants.com where you will find much more information and education on warrants.
© 2007 Dudley Baker
Editorial Archive
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Dudley Baker
PreciousMetalsWarrants.com
Ajijic/Guadalajara, Mexico
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