SPAC Stocks Starter Guide – How To Invest Like A Pro
What is a SPAC?
A Special Purpose Acquisition Company is a shell company and a structure many companies have been using lately to go public. Companies choose to go public via a SPAC to save costs and go through a faster process.
Establishing a SPAC requires initial capital and provides an initial common stock offering of $10 face value for each outstanding share.
A SPAC has usually a lifetime of 3 years. If within this timeframe, a merger didn't occur within 3 years, the SPAC is closed and the investors receive the initial capital.
That means that if you hold common stock, you'll get back $10 for each.
What is a SPAC warrant?
The purpose of a SPAC is to merge with another, more valuable company. Once it does it, the stock ticker changes. The assumption is that after the merger, the company will rise in value.
Warrants let you speculate on that notion.
Buying SPAC warrants gives you the option to buy a certain amount of stocks post-merger at a pre-defined strike price.
Note that not every warrant is the same. Each has different rules and conditions which you need to read first.
What is a Strike Price?
More advanced investments mechanism, such as derivatives (options, warrants) have complicated rules. Mostly, people speculate on the future price of a stock and buy the option to buy or sell it at a future price.
Another name for this future price is a strike price. It defines the price at which you can buy or sell a derivative contract, basically an option to buy a stock for example).
When you buy a Call option, you buy the opportunity to buy the stocks at a certain price in the future. This price is the Call option strike price.
When you buy a Put option, you buy the opportunity to sell the stock at a certain price in the future (usually shorting it, believing that it will drop). This price is the Put option strike price.
Strike price refers also to warrants. You buy a warrant of a SPAC for example to gain the opportunity to buy more shares of the SPAC at a future strike price.
What is a SPAC Unit?
When a SPAC goes on an IPO, it is divided into units. Each unit contains 1 common stock share, and a partial or a full warrant unit.
To know how the SPAC unit is structured, go to SEC.gov and find the S-1 form of the company you're about to invest in.
The SPAC units are available on the day that the SPAC goes public (IPO date) and let you buy in early on the SPAC.
Generally, SPAC common stocks and warrants are not available for trading in the first 52 days after the IPO.
This means that if you invest in the SPAC IPO, you buy SPAC units (which contains stocks and warrant)
What is an S-1 Form?
The main file among these is the S-1 Form, which summarizes all the financial data regarding the company, and mostly describes the nature of the public listing.
Public listings may vary, the company chooses how many stocks to sell, how it is structured, and so on.
In SPACs, the S-1 is specifically important as it outlines the conditions for the SPAC. It defines how the company treats warrants and provides other financial information.
If you invest in SPAC warrants, you have to go over the S-1 as it may contain details that will affect your investment tremendously.
Why Would I Buy a SPAC Warrant?
A SPAC warrant can possibly yield higher return rates. It could give you the ability to buy the share at a lower future price. This makes it possible to double or triple your investment.
However, warrants are highly volatile and there's a risk of losing the whole investment if the SPAC merger doesn't go through.