|
Answer:
Dear Paul,
Good
question...
Warrants
Defined
Well,
first we need to define a warrant. A warrant is actually
a security -- one that give its owner the option to
purchase a stated number of shares of a stock -- not
at any price but rather at a predetermined price.
The purchase of these shares cannot take place at
random, but rather within a previously specified period
of time.
For
example, a warrant might give an investor the right
to purchase 10 shares of XYZ common stock at $30 until
August 1, 2012.
A
warrant is issued by the company of the stock that's
involved. It is almost always (with some exceptions)
initially issued to stockholders of record as of a
certain date. Once a warrant is issued, it trades
in the market like other investments.
Warrants
tend to be around for a long time before they expire
- typically five or ten years.
Why
Corporations Issue Warrants
There
are a number of reasons why corporations issue warrants.
Here are the most common, with the most frequent being
listed first.
-
They are issued as a sort of "sweetener" when the
company wants to raise money by issuing new stock
or a new bond offering.
For example, in the case of bonds, the sweetener
aspect of a warrant would enable the bonds to be
issued with a lower interest rate than would be
the case without the warrant. And, in the case of
a new equity offering, the warrant would make the
stock more appealing to investors.
-
They are used in place of stock dividends, thus
theoretically saving the company money.
- They
are also issued in connection with acquisitions
or reorganization plans.
Trading
& Rights
After
being issued to shareholders of record, warrants are
traded on the exchanges and over-the-counter. In the
newspaper, look for these symbols:
"wt"
designates a warrant
"ww"
designates "with warrants"
"wx"
designates "without warrants
As
a warrant holder, you have no equity rights in the
company, you will not receive dividends, and you do
not have voting rights. (Those rights are restricted
to those who own shares of stock in a company.)
Prices
Two
truisms to keep in mind:
One,
the maximum value of a warrant cannot be greater than
the underlying price of the common stock.
Two,
the exercise price can be fixed over the life of the
warrant or, on the other hand, it can be adjusted
periodically.
Advantages
Of Warrants
A
warrant (like an option) provides a way to wager or
guess on the future price of a stock. (Warrants, however,
are considerably less risky than options.) A warrant
guarantees, for a small fee, the opportunity to buy
the said stock at a stated price during a stated time
period.
A
key plus is that warrants cost less than if you purchase
the stock outright.
Leverage
also works in your favor. For example, a 10% rise
in the price of the stock could mean a 30% or 40%
rise in the warrant.
An
Example
Let's
say an investor pays $1 a share for the right to purchase
stock in Company XYZ at $10 - within a five year time
frame. If the stock goes up to $14 and the investor
exercises (uses) the warrant, he will save $3 on every
share he buys.
He
can then sell the shares at a higher price, making
a profit.
Here's
the math:
$14
- ($10 + $1) = $3. That comes out to $300 on 100 shares.
One
Caution
If
the price of the stock turns out to be below the set
price when the warrant expires, then the warrant becomes
worthless and the warrant holder has a loss. This
of course, can happen, but because warrants tend to
be inexpensive and because they have a long shelf
life, they are actively traded before they expire.
|
