By Martin Mittelstaedt
The Globe and Mail
Warrants are the Rodney Dangerfield of the stock market. They don’t get much respect from investors.
But that could be a big mistake.
A warrant is simply a long-term option to buy a given stock at a fixed price. Although warrants are relatively unknown to investors, they are the perfect security for a bull market.
Their big attraction? They’re a way to amplify your bet on a stock. In a rising market, the value of a warrant will typically increase far more in percentage terms than the underlying common stock in the same company.
To be fair, warrants also experience outsized declines in a falling market. But if you believe in a stock’s long-run potential, they offer a supercharged way to bet on that rosy future.
One investor with a well known predilection for warrants is Warren Buffett, who insisted on receiving them as part of his high profile purchases of shares in General Electric and Goldman Sachs during the financial panic two years ago.