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Question By Ernestine Spence
"Is Stocks or Warrants Better?"
Basically, which is best/better to buy stock or warrants?
Asked on 9 March 2011
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Answered by Mr. OppiE
Hi Ernestine Spence,
Thank you for enjoying www.Optiontradingpedia.com!
First of all, all financial instruments are created with unique purposes and there is therefore no such thing as one instrument being absolutely
better than another. All financial instrument; Stocks, Warrants, Options, Futures, Swaps, are best when you use the function designed for them.
Warrants are derivatives of stocks. This means that without stocks, there can be no warrants either. In order to know trading stocks or warrants is
better for your situation now, lets explore the basic characteristics of each instrument.
The main characteristics of stocks are that you can hold on to a stock forever as long as the company remains in existence. On top of that, if the
stock is a dividend paying one, you receive dividend payments every quarter as long as you own the stocks. You will also become a shareholder of the
company and be able to receive shareholder information as well as vote on certain company events. This is a privilege which you will not get owning
the warrants.
The main characteristic of warrants is leverage. Like options, Warrants allow you to own the profits on the stocks with just a fraction of the price, this means
that you can make a higher profit from the same move on the stock if you bought the warrants instead of the stocks. However, the problem with derivatives
such as options and warrants is that they have a limited lifespan. This means that you will stop owning the position once it expires and if the stock
have dropped enough to go below the exercise price of the warrants (in the case of a call warrant), the whole position can expire worthless and you
will lose all your money in the position. If you have bought the stocks instead, you would be able to hold on to the stocks and wait for it to come
back up eventually no matter how long it takes. The other problem of owning warrants is that if the stock is a dividend paying one, you will receive
the dividend payments only if you own the stock, you won't get any dividends owning the warrants.
However, you can exercise the warrants upon expiration in order to own the stocks if they are in the money by expiration.
Of course, you will have to pay for the stocks at the stated exercise price. Out of the money warrants (warrants that are about to become worthless by expiration)
very near expiration can be extremely cheap and are widely used to speculate on a huge short term move on the stock like a lottery ticket. If the stock did not behave as
predicted, then the warrants position eventually become worthless.
In conclusion, warrants are really good if you are betting on a strong short term (depending on how many days left to expiration) move in the underlying stock and want
to do it with leverage. If you have intention of owning the stocks for the long term and receiving dividends, you will have to buy the stocks instead.
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