What are Warrants ?
You might have already heard about Warrants or maybe think this is just for skilled investors ? Warrants are a great opportunity for you to make money and we will explain to you what are warrants and how to invest in it.
What is a stock warrant ?
A stock warrant is a financial contract issued by the company giving to the investor the option to buy the company’s stock at a specific price (strike or exercise price) before a specific date (expire date). After this date, warrants don’t worth anything.
It grants you an opportunity to have more shares in the future if you do believe the company you invested in will see its share price raise.
Moreover, you can also trade warrants as you trade Common Shares. You can buy them and sell them but it can be more difficult to sell warrants as they are less famous and the volume is generally lower. The warrant price always follow the stock price.
If a company’s stock price above the warrant’s executive price, the investor can redeem the warrant and buy the shares at the lower price. The stock is coming directly from the company.
What are the key data about warrants ?
To explain and understand perfectly how warrants work, let’s take an example. Let’s consider Money,eh? is traded on the stock market and its Share Price as off April, 23rd 2021 is trading at $0,25 per share. Money,eh? decides to issue new warrants with these features :
Exercise price: $0,35
Expiration date: June,1st 2023
Warrant price: $0,07
How do warrants work ?
You always will have to pay a premium for warrants (current warrant price + exercise price – common share price = $premium) as it is a projection of the stock price in the future. In our case, the difference between warrant total price and common share price is :
$0,07+$0,35=$0,42 > $0,25 = $0,17
To convert a warrant, the share price has to be above the exercise price. If not, you can’t convert your warrant. Also, to be profitable in our example, the stock price has to be above $0.42.
Comparison number shares/warrants
Your really like Money,eh? and decide to purchase for $5000 worth of warrants
Number of common shares for $5.000 worth = 20.000 shares
Number of warrants for $5.000 worth = 71.428 warrants
As you can see, buying warrants grants you the opportunity to have more shares in the future if you decide to convert them.
Comparison total value
Now, we have all the key data. Let’s say that 6 months later, the company had a great expansion and brought a lot of revenues. Now the share price is traded at $1.
Stock Price = $1
Warrant Price = $1 – $0.07 (warrant cost) – $0.35 (exercise price) =$0.58 (profit)
Now you decide to convert them. Let’s see what is the difference after the conversion of warrants.
Stock value at 5.000 shares = $20.000
Warrant Value after conversion at 71.428 shares = $41.428
As you can see, converting warrants, in our example could more than double your value investment.
Can I lose my investment ?
You can lose your investment by two ways. The first one is if you don’t convert your warrants and you pass the expiration date, your warrants will become worthless. The second way you could your investment is if the Share Price never reaches the exercise price until the expiration date. In this case, you would lose your investment too.
In conclusion, warrants represent a great leverage for your investments. Before investing in, make sure you have made your researches about any company’s growth strategy, fundamental upside as you could lose it all if the Share Price never reaches the Exercise Price.