Characteristics, Uses and Taxation of Investments - Warrants and Rights


b. Warrants and Rights - warrant and rights enable investors to benefit from the value of the underlying stock upon which they are based but in different ways.

  1. Warrants - these are certificates that derive their value from the underlying stock upon which they are based. Owners have the right to purchase the underlying shares at a price specified in the contract. Unlike options, the party required to deliver shares upon exercise is the issuer, rather than the writer; typically warrants are valid for five years, though some are perpetual. Usually an add-on or sweetener to an issuer's fixed income securities, warrants are attractive to the issuer as they afford it the ability to issue either preferred stock or bonds at a lower interest rate that it would otherwise have to for a similar security. Their value to the holder is the ability to participate in the potential appreciation of the issuer's equity securities at a considerably lower cost and maintain the downside protection of the bond.
  2. Rights - these are available to existing shareholders of a stock to enable them to maintain proportionate ownership in it by being able to buy newly issued shares before the issuing company offers them to the public. The rights allow shareholders to buy the shares below the current market price. Rights are valued separately and trade in the secondary market during the subscription period. Holders can exercise the rights and purchase the stock; sell them or let them expire. Their value is a function of that of the underlying security.
Derivative/Feature Warrant Right Listed Options
Marketability Trade actively in the secondary market. Trade actively in the secondary market. Trade actively in the secondary market.
Cost Less expensive than the underlying equity security upon which it is based. The warrants may be attached to a fixed income issue as a sweetener. Inexpensive relative to the underlying upon whose value theirs is based, rights allow for a discounted purchase of the issuer\'s shares. Valuation is a function of volatility of the underlying investment upon which it is based; the time left until expiration, the level of interest rates and the extent to which the option is either in- or out-of-the-money.
Potential Risks Warrants may expire unexercised. Additionally, they mirror the risks of the underlying stock and could lose a substantial portion of their value. Like their value, their risk is based upon that of the issuer and could lose a substantial portion of their value as a result. Options share in the risk of the underlying security and can magnify losses due to the feature of leverage. Loss is unlimited only with naked calls and short puts.
Term Long term up to five years. Some issues are perpetual. Short term, usually thirty to forty five days. Nine months, LEAPS® have up to thirty nine months.
How Offered Offered as a sweetener for another security to which they are attached, they also trade separately. Offered to existing shareholders, they also trade in the secondary market, but for a much shorter time. Trade separately on an exchange.
Offering Terms upon issuance
Exercise price is higher than the market price (out-of-the-money). Exercise price is lower than the market price (in-the-money). The exercise price may vary relative to that of the underlying security.
Underlying Instruments Common stock Common stock Common stock, bonds, interest rates, stock indices and foreign currencies.
Tangible Assets


Related Articles
  1. Investing Basics

    Investing In Stock Rights And Warrants

    Many companies choose to issue rights or warrants as an alternative means of generating capital to avoid dilution of existing share value.
  2. Investing Basics

    Warrants And Call Options

    Warrants and call options are securities that are quite similar in many respects, but they also have some notable differences. Both give the holder the right, but not the obligation, to buy a ...
  3. Options & Futures

    A User's Guide To Warrants

    These investment vehicles are relatively uncommon in the United States, but they do still appear in U.S. markets.
  4. Options & Futures

    Warrants: A High-Return Investment Tool

    Discover the advantages of this largely unexploited investment vehicle.
  5. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  6. Options & Futures

    5 Equity Derivatives And How They Work

    These derivatives allow investors to transfer risk, but there are many choices and factors that investors must weigh before buying in.
  7. Investing Basics

    Explaining Wedding Warrants

    A wedding warrant is a warrant that can only be exercised if the host asset, usually a bond or preferred stock, is surrendered.
  8. Options & Futures

    NYIF Instructor Series: Warrants

    In this short instructional video Anton Theunissen explains what a warrant is and how it works.
  9. Options & Futures

    Understanding Rights Issues

    Not sure what to do if a company invites you to buy more shares at discount? Here are some of your options.
  10. Investing Basics

    Warrants

    Learn more about this derivative security.
RELATED TERMS
  1. Warrant

    A derivative that confers the right, but not the obligation, ...
  2. Put Warrant

    A type of security that gives the holder the right (but not the ...
  3. Call Warrant

    A financial instrument that gives the holder the right to buy ...
  4. Warrant Premium

    The amount that an investor must pay above the current market ...
  5. Covered Warrant

    A type of warrant that allows the holder to buy or sell a specific ...
  6. Piggyback Warrants

    Additional warrants that are acquired following the exercise ...
RELATED FAQS
  1. Can warrants be written on any security?

    Read about the different kinds of securities that may have warrants written on them, including which types of warrants are ... Read Answer >>
  2. Is there a secondary market for warrants?

    Find out how to trade warrants on the primary market, the secondary market and the over-the-counter market, including how ... Read Answer >>
  3. Are warrants more desirable than options?

    Understand what stock warrants are, the differences between warrants and options, and learn whether warrants or options are ... Read Answer >>
  4. I own some stock warrants. How do I exercise them?

    Typically, stock warrants are derivative instruments added to new issues of stocks or bonds to make these issues more attractive. ... Read Answer >>
  5. How are stock warrants different from stock options?

    A stock option is a contract between two people that gives the holder the right, but not the obligation, to buy or sell outstanding ... Read Answer >>
  6. Are warrants traded by brokers?

    Learn about the role of investment brokers in trading warrants, both in normal stock exchanges and over-the-counter derivatives ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center