A challenging investment climate, such as now, requires considering all of
your investment options.
Whether you are investing in the resource sector or other sectors, i.e.,
bio-tech's, pharmaceuticals, financials, etc. investors should be aware of
and consider their alternatives before plunging in and merely purchasing
shares.
Timing your entry is always of most importance and while never a black and
white situation, you must be reasonably certain that the markets are trending
in the direction of your desired investment, whether up or down.
As we write it appears the resource sector may, just may, have put in a
bottom. While there is never a guarantee savvy investors might want to start
establishing positions in some of their favorite companies. We see signs from
the two charts below that gold has been outperforming the USD and the S&P
500 since August and this is giving us some confidence that the bottom may be
in place.
If you believe, as do we, that it is highly likely that a bottom is in
place in the resource sector then your confidence should allow you to step up
to the plate and start taking some positions.
Alternative Strategies
In lieu of making direct purchases of the common shares of your favorite
companies we encourage you to consider other alternatives, i.e. options,
LEAPS or stock warrants, if any, that may be available. All of these
alternative investments have a defined life and thus can expire worthless but
can provide you with more upside leverage as the markets takeoff.
The use of these alternatives can allow you to reduce your investment
dollars and thus your risk while allowing you to get into the game and
provide you will potentially more upside leverage.
Let's briefly consider your alternatives:
Stock options which are traded on the CBOE.com, Chicago Board Options
Exchange, give the holder the right, but not the obligation, to purchase the
underlying shares at a specific price and expiring on a specific date in the
future. Stock options will have a maximum life of up to 12 months and
investors/traders should determine whether this is a sufficient time horizon.
LEAPS, Long-Term Equity Anticipation Securities, also trade on the CBOE
and have the same definition of options but have longer lives of up to two
years.
Stock warrants are actually securities issued by a company giving the
holder the right, but not the obligation, to buy the underlying securities at
a specific price and expiring on a specific date in the future. Companies
frequently attach stock warrants to their private placements as an additional
incentive for investors to purchase the units.
If you have the ability to participate in a private placement of a company
in which you are interested by all means you should do so as those stock
warrants might give you a considerable return on your investment.
Most investors overlook the fact that some stock warrants actually trade,
as do their common shares on the TSX, TSXV, NYSE, AMEX or NASDAQ. Many of the
stock warrants issued by companies in the United States frequently have lives
of 5 years and sometimes much more giving investors more time for the companies
to execute on their business plans and the the markets to perform to your
expectations. Currently there are about 200 stock warrants trading in the
U.S. and Canada in all industries and sectors.
