Warrants: A High-Return Investment Tool

A warrant is like an option. It gives the holder the right but not the obligation to buy an underlying security at a certain price, quantity and future time. It is unlike an option in that a warrant is issued by a company, whereas an option is an instrument of the stock exchange. The security represented in the warrant (usually share equity) is delivered by the issuing company instead of by an investor holding the shares.

Companies will often include warrants as part of a new-issue offering to entice investors into buying the new security. A warrant can also increase a shareholder's confidence in a stock, provided the underlying value of the security actually does increase over time. (Warrants are just one type of equity derivative. Find out about the others in 5 Equity Derivatives And How They Work.)

Types of Warrants

There are two different types of warrants: a call warrant and a put warrant. A call warrant represents a specific number of shares that can be purchased from the issuer at a specific price, on or before a certain date. A put warrant represents a certain amount of equity that can be sold back to the issuer at a specified price, on or before a stated date.

Characteristics of a Warrant Warrant certificates have stated particulars regarding the investment tool they represent. All warrants have a specified expiry date, the last day the rights of a warrant can be executed. Warrants are classified by their exercise style: an American warrant, for instance, can be exercised anytime before or on the stated expiry date, and a European warrant, on the other hand, can be carried out only on the day of expiration.

The underlying instrument the warrant represents is also stated on warrant certificates. A warrant typically corresponds to a specific number of shares, but it can also represent a commodity, index or a currency.

The exercise or strike price is the amount that must be paid in order to either buy the call warrant or sell the put warrant. The payment of the strike price results in a transfer of the specified amount of the underlying instrument.

The conversion ratio is the number of warrants needed in order to buy (or sell) one investment unit. Therefore, if the conversion ratio to buy stock XYZ is 3:1, this means that the holder needs three warrants in order to purchase one share. Usually, if the conversion ratio is high, the price of the share will be low, and vice versa.

In the case of an index warrant, an index multiplier would be stated instead. This figure would be used to determine the amount payable to the holder upon the exercise date.

Investing in Warrants Warrants are transferable, quoted certificates, and they tend to be more attractive for medium-term to long-term investment schemes.Tending to be high-risk, high-return investment tools that remain largely unexploited in investment strategies, warrants are also an attractive option for speculators and hedgers. Transparency is high and warrants offer a viable option for private investors as well. This is because the cost of a warrant is commonly low, and the initial investment needed to command a large amount of equity is actually quite small.

Advantages

Let us look at an example that illustrates one of the potential benefits of warrants. Say that XYZ shares are currently priced on the market for $1.50 per share. In order to purchase 1,000 shares, an investor would need $1,500. However, if the investor opted to buy a warrant (representing one share) that was going for $0.50 per warrant, he or she would be in possession of 3,000 shares using the same $1,500.

Because the prices of warrants are low, the leverage and gearing they offer is high. This means that there is a potential for larger capital gains and losses. While it is common for both a share price and a warrant price to move in parallel (in absolute terms) the percentage gain (or loss), will be significantly varied because of the initial difference in price. Warrants generally exaggerate share price movements in terms of percentage change.

Let us look at another example to illustrate these points. Say that share XYZ gains $0.30 per share from $1.50, to close at $1.80. The percentage gain would be 20%. However, with a $0.30 gain in the warrant, from $0.50 to $0.80, the percentage gain would be 60%.

In this example, the gearing factor is calculated by dividing the original share price by the original warrant price: $1.50 / $0.50 = 3. The "3" is the gearing factor - essentially the amount of financial leverage the warrant offers. The higher the number, the larger the potential for capital gains (or losses).

Warrants can offer significant gains to an investor during a bull market. They can also offer some protection to an investor during a bear market. This is because as the price of an underlying share begins to drop, the warrant may not realize as much loss because the price, in relation to the actual share, is already low. (Leverage can be a good thing, up to a point. Learn more in The Leverage Cliff: Watch Your Step.)

Disadvantages

Like any other type of investment, warrants also have their drawbacks and risks. As mentioned above, the leverage and gearing warrants offer can be high. But these can also work to the disadvantage of the investor. If we reverse the outcome of the example from above and realize a drop in absolute price by $0.30, the percentage loss for the share price would be 20%, while the loss on the warrant would be 60% - obvious when you consider the factor of three used to leverage, but a different matter when it bites a hole in your portfolio.

Another disadvantage and risk to the warrant investor is that the value of the certificate can drop to zero. If that were to happen before it is exercised, the warrant would lose any redemption value.

Finally, a holder of a warrant does not have any voting, shareholding or dividend rights. The investor can therefore have no say in the functioning of the company, even though he or she is affected by any decisions made.

A Bittersweet Stock Jump

One notable instance in which warrants made a big difference to the company and investors took place in the early 1980s when the Chrysler Corporation received governmentally guaranteed loans totaling approximately $1.2 billion. Chrysler used warrants - 14.4 million of them - to "sweeten" the deal for the government and solidify the loans.

Because these loans would keep the auto giant from bankruptcy, management showed little hesitation issuing what they thought was a purely superficial bonus that would never be cashed in. At the time of issuance Chrysler stock was hovering around $5, so issuing warrants with an exercise price of $13 did not seem like a bad idea. However, the warrants ended up costing Chrysler approximately $311 million, as their stock shot up to nearly $30. For the federal government, this "cherry on top" turned quite profitable, but for Chrysler it was an expensive afterthought.

The Bottom Line

Warrants can offer a smart addition to an investor's portfolio, but warrant investors need to be attentive to market movements due to their risky nature. This largely unused investment alternative, however, can offer the small investor the opportunity for diversity without having to compete with the elephants. (What's true for warrants is true for options, learn more in our Options Basics Tutorial.)

by Reem Heakal

Read more: http://www.investopedia.com/articles/04/021704.asp#ixzz1bab75A2o

Which security offers the best protection against inflation?

The security which offers the best protection against purchasing power risk or inflation is which of the following?

---

a. fixed annuity

b. common stock

c. treasury bond

d. certificate of deposit

---

Answers: b
Debt securities and investments that promise fixed rates of returns are the most susceptible to purchasing power risk or inflation. Fixed annuities, CD’s, and treasury bonds all fall under these categories.

Read more: http://www.investopedia.com/ask/answers/10/inflation-protection.asp#ixzz1bSW36QRQ

44% of people plan to never invest again

JUNE 6, 2011 · 

A recent survey shows that 44% of people plan to never invest money in the stock market again.

“Prudential, which polled more than 1,000 investors between the ages of 35 and 70 online earlier this year, found that 58% of those surveyed have lost faith in the stock market. Even more alarming, 44% said they plan to never invest in stocks. Ever.”

Think about that for a minute.

That decision is not the well-reasoned response of someone who has carefully evaluated the risk and reward ratio of investing.

It is an emotional response born out of fear (“I don’t want to lose my money!!!”) and ignorance (“this stock market is a crock!”).

Here are a few notes to consider:

• Perhaps the worst financial move you could make would be to withdraw from the stock market. These are some of the same people who will complain about money their entire lives, never stopping to realize that their own behavior — decades prior — caused their financial situation
• If you’re truly risk-averse, you have other options to mitigate risk, such as investing in lower-risk investments or changing your contribution rates. However, this assumes you are rational and will “understand” the options. The truth, of course, is that discontinuing investments is anything but rational.
• I don’t only blame these people, by the way. Although we are responsible for our own actions, the financial education in this country has failed us.
• Ironically, as the Wall Street Journal notes, “It looks as though many of the retail investors now getting back into stocks are the same people who bailed from the market just before the start of a historic bull run.” What’s the takeaway? You will never be able to time the market accurately over the long term. This is where some crackpot commenter will say, “DUH RAMIT, I SAW THE HOUSING CRASH COMING A MILE AWAY AND PUT ALL MY MONEY IN RED BRICKS!! NOW IT’S SAFE!! HA HA AHAAHAHA.” You may get lucky with timing once. But eventually, you will lose
• If you’re in your 20′s and 30′s, your time horizon allows you to withstand temporary downturns and still come out ahead by retirement age
• The idea that “I don’t want to lose my money” ignores the fact that by not investing, you will also lose money — it will just be an invisible loss that will only be realized decades later
• Older people who lost everything in the stock market should never have been in that position — their asset allocation failed them
• The investment strategy for the vast majority of individual investors should be passive, buy-and-hold investing. There’s no need to obsessively monitor investments or day-trade. I check my investments every 6-12 months as I have better things to do than micro-monitor these numbers.
• Target-date funds make sure your asset allocation is always age-appropriate with little/no effort from you. It is one of the finest automation strategies in life.

If you’re curious how to set up an automatic investing plan — including which investing accounts I use and how I chose my asset allocation — pick up a copy of my book. Here’s the print version and Kindle version.

Results from the book:

“Thanks for the advice. Have been able to build 25k in a roth, 7k in a 401k, automate all my finances and live a bliss life thanks to your book.”
–Adrian S.

“Since I bought your book, I’ve cleared five thousand in credit card debt and twenty thousand in student loans. I’m maxing out my roth and my 401k, have a savings plan and negotiated my way into six figures.”
–Nicholas C.

“After buying your book, my personal finances have changed completely…all of my credit cards (which I pay off in full each month) are completely automated. I also rolled both 401ks into a Vanguard IRA.  Yesterday, I was able to put enough money into the IRA to max it out for the year 2010…something I didn’t think I’d be able to do for a few years.  I’m setting up an autopayment plan to put my 2011 IRA payments on cruise control.”
–Steve K.

http://www.iwillteachyoutoberich.com/blog/44-of-people-plan-to-never-invest-again/

Risks rise for India as global economy totters

The Indian economy faces the added risk of heightened policy paralysis, which economists say has the potential to hurt growth as investors stay on the sidelines.

Surojit Gupta, TNN | Sep 25, 2011, 12.04AM IST

NEW DELHI: Risks for the Indian economy have intensified in recent weeks and any drastic change in ratings by global rating agencies in coming months could pile pressure and add to the gloom that has gripped Asia's third-largest economy.

Ratings agency Standard & (S&P) says risks associated with weaker-than-expected global growth, sovereign debt concerns in Europe and potential tightening in funding conditions weigh on Asia-Pacific's sovereign credit trends.

The Indian economy faces the added risk of heightened policy paralysis, which economists say has the potential to hurt growth as investors stay on the sidelines.

"The three risks would be inflation, low or negative growth in the agricultural sector and potential policy paralysis if further issues arise which could stop the proceedings in the Parliament, as has been the case until quite recently this year," Takahira Ogawa, S&P's director of sovereign and international public finance ratings, told TOI when asked about the key risks facing the economy. S&P has a BBB- (stable) rating on India, which implies investment grade.

"We expect India's growth rate for fiscal year 2011-12 to be 7.8%," Ogawa said.

Several economists that TOI spoke to said growth could slow to 7.2 to 7.5% in the current fiscal largely due to the impact of the Reserve Bank of India's aggressive interest rate tightening to counter stubbornly high inflation. The International Monetary Fund too has trimmed India's growth estimates citing weak growth in the rest of the world.

According to Ogawa, the fiscal deficit - a measure of the extent to which the government has to borrow - could widen to 5.7% of gross domestic product this year if crude prices remain high. Asked when S&P will issue fresh ratings views for India, Ogawa said: "We review our sovereign ratings on a regular basis. Our analysts will make the calls on credit risk as they see them based on Standard & Poor's published rating criteria."

The global economic situation has worsened in recent weeks. The Federal Reserve on Wednesday said there are significant downside risks to the US economic outlook, including strains in the global financial markets. The rising economic woes on both sides of the Atlantic have wreaked havoc across global financial markets.

In India, the stock market has plunged while the rupee has posted its biggest weekly fall in more than 15 years. Industrial growth in July slowed to 3.3% while high interest rates have hit investments. Exports are expected to moderate and lower-than-expected receipts may make it difficult to bridge the fiscal deficit. Developments on the political front have added to the policy paralysis that had set in after a slew of scandals emerged last year.

"There is complete drift and no decision making. There is a sense of despair. I don't remember a situation like this before. I don't see any cure in the short term," former RBI governor Bimal Jalan said. He said even if there were adverse rating actions in the months ahead it would lead to some short-term volatility in the stock market. According to him, the key issue is to restore confidence.

Analysts say the slide of the rupee is not a good sign and there is an urgent need for the government to act and reverse the situation to enable the economy to return to its robust growth path.

"What is worrying is that the rupee has collapsed. This is a real concern. This means money is not coming in. This is not good for a country which is planning to grow at 8%-9%," HDFC chairman Deepak Parekh told TOI.

"We have to open up FDI, make it attractive for companies. Indian companies are going abroad, foreign companies are not coming in. This is a cause for great concern. We are a capital short country. The government has to find ways to get long-term foreign investment into the country. Policies have to be fixed," he said.

But Kaushik Basu, the finance ministry's chief economic adviser, defended the government's handling of the price situation. "I believe it is a difficult situation that has been very well handled in India. This is clear from global comparisons. We are still amongst the most robust economies," he said.

http://timesofindia.indiatimes.com/business/india-business/Risks-rise-for-India-as-global-economy-totters/pmarticleshow/10108814.cms?prtpage=1

"India presents a more serious cause for worry" as its economy "is slowing sharply"

India's economy slows sharply: Moody's

October 18, 2011 - 7:05AM

India's slowing economic growth is a "cause for worry", research group Moody's Analytics says, highlighting the failure of aggressive interest rate hikes to curb near double-digit inflation.

India's growth has weakened under the brunt of 12 interest rate increases since March 2010 that have pushed up borrowing costs for everything from consumer appliances to plant equipment.

India's growth would slow from an expected 7.8 per cent year-on-year in the first half of 2011 to 6.5 per cent by mid-2012, said Glenn Levine, senior economist at Moody's Analytics.

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That still implied a "soft landing" - a rate of growth high enough to avoid recession - Levine said in a research note on Monday, while warning that this outcome was "by no means assured".

Although the economy of neighbouring emerging market China was also slowing, it was happening "at an entirely manageable rate", Levine said.

"India presents a more serious cause for worry" as its economy "is slowing sharply", he said.

With inflation remaining stubbornly high at 9.72 per cent in September, India's central bank may be forced into further monetary tightening in the months ahead which would exacerbate the slowdown, Levine said.

Many economists expect another 25-basis point rate hike later this month, pushing India's benchmark lending rate to around a three-year peak of 8.50 per cent.

"So far, the Reserve Bank of India's 325 basis points' worth of tightening must be judged a failure" while domestic demand has been hit hard, Levine said.

The faltering US economy and euro zone debt crisis are beginning to curb growth in Asia, prompting many central banks in the region to shift focus from fighting inflation to promoting growth.

Indonesia, whose central bank was the first in the region to loosen monetary policy in response to the latest global financial crisis, is "still in good shape", Levine said.

Singapore, among the most open, trade-dependent economies in Asia, and whose growth path is a bellwether for the region, has shown a rebound in economic expansion, he noted.

China's economy should help keep growth in the Asia-Pacific region on a solid footing, Levine said.

"But if China and India, the region's two emerging giants, were to slow more than expected, much of the region could be pushed into recession," he said.

Australia "offers the clearest example" of vulnerability with growth driven by booming mining and its strong links to Chinese commodity demand, while the rest of the economy is still struggling, he said.

"A fall in commodity demand linked to slowdowns in China and India would be enough to knock Australia's patchy recovery off track," Levine said.

South Korea also relies heavily on China's demand for plant equipment and other machinery.

Its growth should continue at a "decent, though not outstanding clip," he forecast, but there are "growing downside risks" from any collapse in export demand.

AFP

http://www.smh.com.au/business/world-business/indias-economy-slows-sharply-moodys-20111018-1ltvd.html#ixzz1b5ccX7qd

Intrinsic Value Calculator and Spreadsheet Template

http://www.intrinsicvaluecalc.com/

Intrinsic Value Calculator  Value investors actively seek stocks of companies that they believe the market has  undervalued.  They believe the market overreacts to good and bad news, resulting  in stock price movements that do not correspond with the company's long-term  fundamentals. The result is an opportunity for value investors to profit by buying  when the price is deflated. (courtesy of Investopedia.com) Want to estimate the value of a stock? Try this top-rated Intrinsic Value Calculator! Simply enter your stock symbol and click "Submit" to get started. Read more about Value Investing

Enter Stock Symbol and click Submit Enter Stock Symbol  Terms of Use STEP 1:   Input values and click "Calculate Intrinsic Value" Input or Adjust values: Current EPS (TTM) : Where to find EPS(ttm)? Estimated Growth Rate to use: % Where to find growth rate? Future PE To use: View current PE  View historic PEs Current Price $: Where to find current quote? STEP 2:   Review Results Review Results Estimated Intrinsic Value Price: $ Estimated Margin of Safety Value Price: $ 5-Year Return on Investment Capital (ROIC): (A strong business will have a 5-Year ROIC of 10% or greater)    Review Technical Chart View Technical Chart for ; trade on momentum [MACD(17,8,9) and 10-day MA]  Other useful research links: View Key Statistics for  View Historic Equity Growth (Book Value / Share) for  View Historic EPS and Sales Growth for

How is the Estimated Intrinsic Value calculated?
The software determines an estimated growth rate based on the historic EPS and Equity growth rates. It then applies FV (future value) calculations to determine the expected EPS and stock price at some point in the future. It then reverses the calculation using a minimum acceptable rate of return (15%) to determine the intrinsic value in today’s dollars. The MOS price is half of that estimated intrinsic value price. Value investors
believe that risk can be minimized by only investing when the current price falls below the MOS price.




http://www.valuestockmoves.com/spreadsheetinfo.php

Click to Download this FREE!
Intrinsic Value Excel Spreadsheet Template

(or Right-Click and select 'Save-As')

Calculates the intrinsic value and MOS (margin of safety) for your stocks

Additional notes:

If you’re worried about earnings and earnings growth consistency and want to factor it in somehow, you may want to attenuate growth rates or bump up the discount rate to account for uncertainty.

The keep-it-simple-safe (KISS) approach used by most value investors, including Warren Buffett, is to discount at a relatively high rate, usually higher than the growth rate. 

Buffett uses 15 percent as a discount, or “hurdle” rate – investments must clear a 15 percent “hurdle” before clearing the bar.  The 15 percent hurdle incorporates a lot of risk, especially in today’s environment of relatively low interest rate and inflation. Conservative value investors usually use discount rates in the 10 to 15 percent range.

Don’t Let Your Losers Become Big Losers

Don’t Let Your Losers Become Big Losers

So with my Trailing Stop Strategy, when would I have gotten out of the failing muscle-shirt business? You already know the answer.

Remember, the shares started at $10 and fell immediately. Instead of waiting around until they fell to $6 as the business faltered, using my 25% Trailing Stop, I would have sold out at $7.50. And think of it this way – if the shares fall to $8, you’re only asking for a 25% gain to get back to where they started. But if the shares fell to $5, you’re asking for a dog of a stock to rise 100%. This only happens once in a blue moon – not good odds!

Take a look at how hard it is to get back to break even after a big loss...

You’ll Never Recover
Percent fall in share price	Percent gain required to get you back to even
10%	11%
20%	25%
25%	33%
50%	100%
75%	300%
90%	900%

So what’s so magical about the 25% number? Nothing in particular – it’s the discipline that matters. Many professional traders actually use much tighter stops.

Ultimately, the point is that you never want to be in the position where a stock has fallen by 50% or more. This means that stock has to rise by 100% or more just to get you back to where it was when you bought it. By using this Trailing Stop Strategy, chances are you’ll never be in this position again.

http://www.dailywealth.com/1041/Don-t-Lose-Money-The-Most-Important-Law-of-Lasting-Wealth