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Traditional corporate equity warrants

Introduction| Course| Q&As | Recommended reading| Quiz |

20. Conclusion

Top ten things to remember about warrants

1. Make sure you always read the warrant terms carefully. Check features like the number of shares per warrant, and the exercise dates. Especially look out for any unusual conditions governing the warrant.
2. The biggest mistake in warrant speculating is buying a warrant purely for technical reasons - i.e. because it has a low premium and high gearing. Remember: a warrant may have a low premium for a very good reason. Only speculate on a warrant if you have a view on the underlying equity.
3. Gearing works both ways! Warrant prices can rise - and fall - very quickly. The warrant market is a high-risk game, and is not for widows or orphans.
4. When dealing, beware of poor liquidity. This is about the greatest drawback of the warrant market. Poor liquidity is reflected in small dealing sizes and wide bid-offer spreads. If you have a warrant position open, how quickly can you close it?
5. Don't worry too much about the mechanics of exercising warrants. Individual investors very rarely exercise warrants - they buy warrants, and then close their positions by simply selling the warrants back into the warrant market.
6. The warrant premium indicator is popular and quick to calculate. However, the CFP indicator is superior and should be used in preference.
7. Don't get too technical - the warrant market just isn't that efficient to justify overly complex analysis with spurious precision.
8. Embrace complexity! This seems to contradict the advice above. But instead of complex analysis, this refers to the complexity of the warrant terms and the occasional difficulty of finding information on warrants. Opportunities exist in hidden, fiddly markets.
9. There is more to investing in warrants than buying one and hoping it goes up. Take some time to investigate opportunities for gearing switches, hedging, arbitrage and other strategies more advanced than simple speculation.
10. Finally, don't buy a warrant and forget about it! Warrants are wasting assets that after expiry are worthless.

You have now completed the course. To test your knowledge, take the Assessment test.

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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