Monday, July 04, 2005

Buying warrants vs buying shares 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
I feel tempted to purchase warrants sometimes, as a proxy for shares that I am interested in.

There are several clear advantages. The main one is of course that the warrant is cheaper, which means the investor needs to commit less capital to make a play on the company. This is especially so if he is looking at capital appreciation rather than income, since typically the warrant price rises in step with the share price, meaning that percentage gain is greater. Secondly, nowadays warrants are enjoying greater liquidity following promotion by the market makers.

What stops me is what some might call a conservative attitude in investment. Often the warrant trades at a premium. For example, an in-the-money (ie. exercise price < current price) warrant's price typically incorporates a premium (ie. exercise price + warrant price > current mother share price); this accounts for the exercise period of course but I don't like the idea that the option could expire worthless after that period; this does not happen with the mother share. Secondly, one does not get dividends with the warrant. For blue chips where a substantial portion of total investor returns comes from dividends, buying the mother share sure sounds more worthwhile.

Some also feel that trading warrants is a zero-sum game, since one of the parties (seller or buyer) loses when warrant price changes. This is more so for structured warrants since the issuer (typically an investment bank) cannot issue new shares, but has to buy them off the market to fulfil any new warrant conversions; for company warrants, the mother company simply issues new shares. Besides, buying them off the secondary market (ie. on the actual trading market) rather than first-hand from the issuer does not, to me, confer any information disadvantage on the small investor, who might simply be buying it off another small investor. Or the market maker.... well it depends.

Perhaps the best way to look at the warrants vs shares issue is to consider the former if one feels there is a good chance of capital appreciation in the short- to medium term. Also, if you would have bought 10 lots of the mother share at $1 (for example), consider buying 10 lots of the warrant at $0.10(say) instead of using all the $10,000 capital to buy 100 warrant lots. Meaning, you expose yourself to the same monetary benefits or risk in the warrant as in the mother stock. And you can allocate your remaining capital elsewhere.




Post a Comment

<< Home