There’s a way to invest in a company you like that most investors completely overlook.

It’s called a stock warrant.

Back in February, I (Chris Reilly) introduced you to John Pangere, my friend and former investment banker who specializes in uncovering these asymmetric opportunities. 

In one example I shared, the stock of a small company called Purple Innovation (PRPL) gained 365%, while the warrants soared 4,942%... achieving the rarefied air of a 50-bagger.

That’s a huge difference. And John’s recommended similar warrants trades that have gained 600%, 942%, 2,174%, and higher. 

Of course, most warrants will not do this. The point is that a warrant can give you a very different way to invest in a company. And once you understand how they work, you may start seeing opportunities you’ve been overlooking.

I asked John to walk us through the basics, explain how he looks for promising warrants, and share what beginners should know before making their first trade.

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Chris: John, let’s start with the basics. What exactly is a stock warrant?

John: A warrant is just the right to buy stock in a company at a specific price up until a specific date in the future. It sounds like options, except the company itself issues warrants directly to shareholders. And they trade just like the regular stock. 

Several legendary investors, including Warren Buffett and Carl Icahn, have famously made billions of dollars on warrants.

That’s because warrants are often offered to “sweeten” deals. When some companies go public or need to raise money for some other reason, they issue warrants to attract more capital.

Warrants amount to “bonus” shares in a company. They’re typically not worth much upon issuance. But because their starting prices are so low, they can gain many, many multiples more than the stock in the same company does.

Chris: Talk more about that... Essentially, you say warrants are another way to participate in a company’s upside, right?

John: Right. So instead of buying the stock outright, you buy the warrant, which typically costs far less than buying a share of the underlying stock. And it’s as easy as buying any stock in a regular brokerage account.

That lower upfront cost can create leverage. If the company does well and the warrant becomes much more valuable, your percentage gain can be substantially larger than the gain in the stock.

But there’s a trade-off. Warrants are speculative investments. And just because one costs less than the underlying stock doesn’t mean it’s a bargain. 

That’s why, as part of my strict filtering process, I focus on finding warrants tied to companies with a real business, or real potential, rather than simply chasing the cheapest ones.

Chris: How do you tell the difference between a promising warrant and one that’s cheap for a reason?

John: I use a framework I call T-U-V: Time, Underlying stock, and Volume.

• Time: How long does the warrant have before it expires? I generally want enough time for the investment thesis to play out. If a warrant expires too soon, you may not have much room for the company to execute its plans.

• Underlying stock: I start with the company itself. I wouldn’t buy a warrant on a business I wouldn’t consider owning outright. I want to understand what the company does, why it could grow, and what might drive its stock higher.

• Volume: Can I actually buy and sell the warrant at reasonable prices? Some warrants trade very lightly. That can make it harder to enter or exit a position, and the gap between the buying and selling prices can be wide.

All three matter. A cheap warrant isn’t automatically a bargain. I want enough time, a company with a credible opportunity, and a market where I can trade the warrant sensibly.

Chris: Suppose someone understands the idea and wants to look at a warrant for the first time. What should they know before placing an order?

John: Start by doing your homework. Confirm the exact warrant ticker and read its terms. With warrants, the ticker usually includes a  “W” at the end. Take quantum stock Rigetti Computing. The stock ticker is RGTI. The warrant is RGTIW.

If a company has a warrant that trades, it will usually follow that pattern with its ticker symbol. There’s a little more to it than that. But that’s a good place to start.

Chris: Anything else?

John: Make no mistake, warrants can be thinly traded, and prices can move quickly. So practicing proper risk management is key. 

That’s why I also recommend using limit orders rather than blindly placing a market order. A limit order lets you set the price you’re willing to pay or accept, although it doesn’t guarantee your order will be filled.

And remember, warrants are speculative investments. You should understand how much you could lose first before anything else. Then you can size a position accordingly.

The important thing is to understand what you own before you buy it.

Chris: Thanks, John. 

And reader, I’m sure you have more questions about warrants and how to start trading them the right way. 

That’s why, this Wednesday, October 28 at 11 a.m. ET, I’ll be hosting a live Q&A with John. He’ll explain how he evaluates an opportunity.

The session is free and open to all RiskHedge readers.

If you’ve ever wondered how warrants work, how to find them, or what to watch out for, this is your chance to ask the person who studies them every day.

[Save your spot for Wednesday’s live Q&A here.]

And if there’s a warrant question you’d like John to answer, make sure to reply to this email. 

Hopefully, I’ll see you soon!

Chris Reilly Executive Editor, RiskHedge