What Is The Executive Dividend Program?
The Executive Dividend Program or “EDP” as it is referred to is simply investing with Warrants. This isn’t the legal document that leads to an arrest.
So what is a warrant?
A warrant, could be thought of as similar to a call option, but issued and guaranteed by the company. Whereas options exchange units that are not issued by the company. The lifetime of these investment vehicles are determined by the contract. Normally an option has a much shorter life span then a warrant.
When are warrants used?
Many times, you will find warrants attached to private funding transactions. An example would be when a private investor purchases stock in a company, the company sweetens the deal by including warrants on top of the purchased stock, creating what normally is referred to as a unit. Theoretically, the unite could be made up of10,000 shares of company XYZ at $1 per share and warrants to purchase an additional 10,000 shares at $1.5 within the next 2 years. The life span of the warrants are set by the company.
Why would this be attractive?
Warrants can be extremely lucrative when investing in a company whose stock continues to go up. Obviously being able to execute $1.50 warrants when the stock price is at $3 would be extremely ideal and highly profitable. On the flipside, you probably wouldn’t want to exercise your warrants if the stock price was below your warrant price. So the same rules apply when making any investment, due your due diligence.
Issuing warrants, for the company, can also be a form of protection. While including warrants as part of a funding package, or unit, the company is encouraging the investor to hold on to their stock at least until the warrants are executed or the life span runs out. This also allows the company to tap into the same investor multiple times for funding.
It is not unheard of for a company to include warrants that can be executed at different prices. In the penny stock world, this could be used as payment incentive for stock promoters. A stock promoter might receive warrants that can be exercised at laddered prices, $1, $2, $3 etc…Keep in mind that it is illegal for a stock promoter to be paid directly from the company in the form of free trading stock.
Cashless Exercise of Warrants
In a cashless exercise, the investor surrenders his warrants to the company and receives back an amount of stock that is reduced by the exercise price of the warrants instead of paying cash. For example, the company you invested in is trading at $2, and you own warrants to purchase 10,000 shares at $1. Instead of paying $10,000 for 10,000 shares, you would pay $0 and receive 5,000 shares. Many times it’s not as simple as that.
The video below is a very general description of stock warrants:
Profitability of Warrants: Warren Buffet
Below is a video interview with Warren Buffet regarding Berkshire Hathaway’s investment Goldman Sachs, which included preferred stock and warrants:
How to invest in warrants
It can be difficult to actually find warrants to invest in that are publicly traded. However, a crude and effective way is to head over to Yahoo Finance put the ticker of the company you’re interested in followed by –WT. If there is a warrant on the market for that company, it should show up there.
Warrants, while fairly easy to understand, are considered a more advanced topic when it comes to investing. The only reason being is, they are not a common topic among main street investors. The point is, there are many potentials and pitfalls out there, and if you are investing your money yourself or with a professional you should, at the very least, be aware of their existence. Remember, it’s your hard earned dollar, and ultimately you are responsible for investing poorly or Investing Wisely.