Making Enormous Profits with Warrants
Warrants are risky! There is no way around that simple fact. However, there is a tremendous risk/reward opportunity for those with tough stomachs. But, what are warrants? How does one invest in them? Why should one invest in them? Find the answers to these questions below.
What are warrants? They are options issued by corporations to buy a number of shares (typically just one) of their common stock a given price for a certain period of time. Sometimes, they can be issued by one company for stock it owns in another company. Companies can also issue multiple classes of warrants with different expiration dates, exercise prices (the price at which you can buy the common stock), etc.
How does one invest in warrants? One way to is through conversion to common stock. To do this, you would buy the warrant at say $1 with an exercise price of $5/share. When you bought the warrants, the common was at $4/share. Now, you could wait until the common reaches $5/share, exercise your warrants, and receive a discount on the common's price (conversion price - current warrant price = price for conversion to common).
The other way--the Bowser way--is treating them like they are regular issues. So, using the Bowser Game Plan, if you bought the same warrants at $1 you could wait until they double and then sell half of your holdings, and then the other half after they drop 25% from their high. Yes, warrants can be traded just like common stock. This method could yield higher profits.
Why invest in warrants? LEVERAGE! We did an article about leverage in penny stocks, but the leverage in warrants is even greater. Put simply, one dollar in warrants can do the same work as several dollars in common. As a company's common approaches its exercise price, the warrants can rise wildly. In our May 2012 issue, we talked about the leverage of two of our warrant companies:
We discussed Homeowner's Choice (HCI). HCI's common from March 1 to May 2 rose from $10.90/share to $14.76/share--a 35.4% gain. The warrants, over the same period, rose from $0.90 to $2.99--a 232.2% gain. Now that's leverage! 1,000 shares in the common would have yielded around a $354 profit, but 1,000 shares in the warrants, a $2,322 profit--ALMOST $2,000 MORE!
We also discussed Ford Motor Company's (F). Leverage is a double-edged sword and Ford provided us an example of this. From March 1 to May 2, the common slid from $12.66/share to $11.10/share--a 12.3% loss. Over the same period, the warrants slid from $3.72 to $2.31--a 37.9% loss. Therein is the risk in warrants--they can rise faster and fall faster.
Warrants can be a great opportunity for those who enjoy low-priced, high risk investing. We have had many subscribers tell us of their success in warrants, so we stand by them as a profitable option. As with any investment, DUE DILIGENCE is a must! Research, research, research. The Bowser Report does dedicate a page of the newsletter to warrants each month. Also, we have the very informative Warrant Booklet, which is available in our shop.
The Bowser Report is a monthly financial newsletter that specializes in small stocks trading for $3/share or less. Our goal is to provide the individual investor with relevant information on microcap stocks. Each month, we recommend a new company, provide information on past recommendations and report news surrounding the microcap marketplace.
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Information in this blog post contains references to past Bowser recommendations. This blog post contains no recommendations, and instead relies on data gathered on past recommendations from sources thought to be reliable.
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