Preferred and Derivatives  

Warrants
A warrant represents the option to buy shares of the issuing company at a stated price (the exercise price) to a specified date (the expiry date). Most warrants are exercisable for a period of several years from their date of issue. Warrants issued by junior resource companies are a notable exception, usually expiring within one year of their date of issue. Perpetual warrants are another exception but are extremely rare.

Variations of the basic warrant include warrants with extended expiry dates, and piggyback warrants which entitle the holder to acquire additional warrants on exercise of the original. While they usually represent the right to buy common shares of the issuer, in recent years warrants have been issued entitling holders to acquire flow-through shares, preferred shares, corporate debt instruments, gold, silver, U.S. dollars and even Government of Canada Bonds. Warrants may be attached to new debt and preferred share issues to increase the marketability of such issues. These warrants are usually detachable. Also, warrants are frequently offered to the public in units which combine common shares with warrants to acquire additional common shares. Warrants issued in this manner are usually separable from the stock at some later date and can then be traded separately.

The value of a warrant at any given time depends upon its exercise price, the market value of the underlying shares and the time left to expiry. When the market value of the shares exceeds the warrant exercise price, the warrant has an intrinsic value equal to the excess of market value over the warrant exercise price. When the market value of the shares is less than the warrant exercise price, the warrant carries a premium equal to the excess cost of acquiring stock by exercising the warrant over the cost of acquiring stock directly. The premium or speculative value of a warrant diminishes as the expiry date draws near. On expiration, all warrants are worthless.

A warrant’s leverage potential is its most attractive feature. Leverage refers to the appreciation or loss potential of a warrant. Because of the relatively low cost of investing in warrants, any increase in the value of the underlying stock will result in a much greater increase in the value of the warrant. The greater the leverage, the greater the warrant’s appreciation potential when the value of the stock rises and conversely, the greater the warrant’s loss potential when the value of the stock falls.

Warrants can be traded in the market for capital gains or they can be exercised to acquire shares at a cost lower than market value. Low cost, versatility, and the high potential for capital gain make warrants an interesting and attractive investment option.