You also need to be familiar with the following equity instruments:

Preemptive Rights

As a stockholder, an investor has the right to maintain a percentage interest in the company. This is known as a preemptive right. Should the company wish to sell additional shares to raise new capital, it must first offer the new shares to existing shareholders. If the existing shareholders decide not to purchase the new shares, then the shares may be offered to the general public. When a corporation decides to conduct a rights offering, the board of directors must approve the issuance of the additional shares. If the number of shares that are to be issued under the rights offering would cause the total number of outstanding shares to exceed the total number of authorized shares, then shareholder approval will be required. Existing shareholders will have to approve an increase in the number of authorized shares before the rights offering can proceed.

  • Rights offerings present common stock to current shareholders at a discount. Rights can be exercised, sold to another party or the rights may simple expire un exercised. They cannot be sold back to the company for cash. If rights are not exercised during a brief window of opportunity, they simply expire.
    The article Understanding Rights Issues details the various options available to investors when a company issues rights.
  • Warrants A warrant is a security that gives the holder the opportunity to purchase common stock. Like a right, the warrant has a subscription price. However, the subscription price on a warrant is always above the current market value of the common stock when the warrant is originally issued. A warrant has a much longer life than a right, and the holder of a warrant may have up to 10 years to purchase the stock at the subscription price. The long life is what makes the warrant valuable, even though the subscription price is higher than the market price of the common stock when the warrant is issued.

    Warrants generally have longer expiration periods than rights do, and they may have no expiration date at all. They can be detached from, and traded separately from, the bonds with which they were issued.

    Discover the advantages of this high-return investment tool within the article What Are Warrants?

  • American Depository Receipts (ADRs) are issued by U.S. banks and represent the ownership of a foreign stock. ADRs are traded on a U.S. exchange. For American investors, ADRs help to simplify the process of investing in foreign companies by denominating the investment in dollars, providing a more convenient local market and lowering transaction costs.

    Learn more about these securities within the article: What Are Depository Receipts?



Determining Gains and Losses

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