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Traditional corporate equity warrants

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1. Introduction

Welcome to one of the more esoteric and hidden areas of the investment world

Warrants are fantastic

For many investors, warrants are likely to be filed in the "to be looked into later" drawer. This is a shame. Although many existing warrant investors are probably happy for the market to remain out of the limelight - why spoil a good thing?

So, what are warrants? Warrants exist in a world between shares and options. They share some of the turbo-charged performance of options, without taking on so much of the complexity and risk. Warrants add spice to simple share investing, and flexibility to portfolio strategies.

The great attribute of warrants is a feature called gearing. Simply, warrants magnify the performance of the underlying shares; if a share price increases a bit, its warrant can rise spectacularly. Gearing is what adds rocket fuel to the performance of warrants - and gets the heart racing. Why invest in a share that rises 25%, when you can invest in its warrant that soars over 100%?

If warrants are so great, why isn't everyone investing in them?

Unfortunately, an investor interested in learning more about warrants comes up immediately against two hurdles:

1. The warrant world is obscured with confusing vocabulary. Admittedly many areas of finance are clouded in obtuse terminology as well, but the warrant world in particular is quite inventive in its concoction of strange terms (e.g. capital fulcrum point). Beyond this, warrants require a certain degree of mathematical analysis not found in the analysis of shares.
2. The second problem is that there is very little written about warrants: neither general information nor detailed research.

This course

The purpose of this course is to address the two problems listed above. To explain simply the vocabulary of warrants, and to provide the tools for their analysis.

In the big scheme of things, warrants are not that complex (as this course will show), but there are certain concepts that must be understood. Warrants are high-risk instruments: the potential for huge gain exists, as does the potential for huge loss. But the downside risk of warrants can be greatly reduced with some simple precautions.

There is nothing magic about the behaviour of warrants. They can be - and should be - understood by simple, logical analysis. This course aims to provide the framework for that analysis.

1. Introduction 2. What is a warrant? 3. The warrant market 4. Advantages of warrants over shares - the magic of gearing 5. Further attractions of warrants 6. Disadvantages of warrants 7. Fundamentals - warrant terms 8. Fundamentals - intrinsic value and parity ratio 9. Basic analysis 10. Analysis - time value and premium 11. Analysis - gearing 12. Analysis - break-even and capital fulcrum point 13. Analysis -sample spreadsheets 14. Analysis - summary 15. Investing strategies 16. Dealing in warrants 17. Warrant exercise 18. Further topics 19. Further information 20. Conclusion

Recommend Reading

• Andrew McHattie on Covered Warrants

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