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Microcap & Penny Stocks : Zulu-tek, Inc. (ZULU) -- Ignore unavailable to you. Want to Upgrade?

To: PartyTime who wrote (14114)	9/16/1998 10:57:00 PM
From: Jon Tara	Respond to of 18444

Warrants act like long-term call options. Higher risk, higher reward. The difference between warrants and options is that warrants are issued by the company, rather than by an options exchange, and the affect the stock price differently, since they represent potential dilution. Think of it this way: a call option is the right to buy existing stock. An investor who holds the stock writes you the option, and collects the premium (what you paid for the option) from you. If the option expires in the money (above the strike price) the guy that wrote the option has to deliver the stock to you at the strike price. There is no dilution of the shares - the number of shares does not change. A warrant is the right to buy newly-issued stock from the company. If the warrant expires above the strike price, the company must sell you stock at the strike price. The company may realize much less than the current market value of the stock for the newly-issued stock (if the current price is much higher than the strike price), resulting in dilution of the stock. You will often see, when a warrant nears expiration, if the stock price is near the warrant strike price, the stock price will be held-back so that the warrants expire worthless. Think about it - it really is to the advantage of shareholders (those who are not holding warrants, anyway!) for those warrants to expire worthless, and thus not dilute the shares. So, it's better for shareholders for the stock price to temporarly falter. I suspect that MOST warrants, like most options, expire worthless. On the other hand, holding warrants in a good company long-term can be very profitable. Consider Intel warrants, now expired. People who bought Intel warrants even a couple of years before they expired made out very, VERY well. Warrants offer this huge profit potential, though, because they ARE essentially call options, and they CAN expire worthless. You can lose your entire investment, much more easily than you can in the underlying stock. (e.g. warrants can expire - the stock lives on, but the warrants are kaput and worthless.) Warrants tend to INCREASE the volatility of the underlying stock, while options tend to DECREASE volatility. When warrants expire, volatility is decreased, because an uncertainty about dilution is then removed. Warrants are NOT something that this company needs right now. :) You should HOPE that they get to the point where options are traded on the stock: the price would have to be higher (typically at least $10 and usually more). And some mutual funds will not buy a stock until there are options traded on the stock. (Because the options give them the ability to hedge.) Conversely, some funds will not buy stocks that have warrants outstanding, though this is less common, and one presumes that exceptions were made for Intel. :)