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Stock warrants are issued with stocks or bonds, giving the buyer the right to buy shares at a set price in the future. They can be attractive to investors and have a long shelf life. They differ from call options, which are short-term options.
Stock warrants are derivative securities that are issued together with other stocks or bonds. They give the buyer the right to buy shares in the future at a specified price. Stock warrants, also called stock purchase warrants, are often issued in conjunction with preferred stock or bonds to make the purchase more attractive to investors.
If a company issues bonds to finance a capital project, it may issue stock warrants along with the bonds. An investor who buys a bond would also receive warrants for a set number of shares at a set price. This allows the company to potentially pay a lower interest rate on the bonds than it otherwise would, since the investor also receives the option to purchase common shares later. This may be attractive to an investor because the order may allow him or her to buy that share at a price that may be less than the price of the share at that time.
Securities warrants are issued and guaranteed by the issuing company. They have a long shelf life, with expiration dates up to 15 years in the future. Like stocks, warrants can be traded over the counter. US orders can be exercised at any time prior to the expiration date. European warrants must be exercised on the expiration date
For example, XYZ Corp. is issuing bonds with stock warrants. Joe Investor purchases a $10,000 US Dollar (USD) bond that will pay him 10% interest and receives 10-year warrants to purchase 100 shares of XYZ common at $10 per share. XYZ Corp. common stock is currently trading at $8 USD per share. Note that warrants are always issued for more than the current share price.
Two years later, XYZ Corp. common stock is trading at $7 per share. Joe still gets 10% interest on his bond, and he still has the warrants for his arrest. He doesn’t exercise the warrants now, because the price is still above the market price.
Three years after that, XYZ Corp. common stock is trading at $15 per share. Joe can exercise his warrants and buy 100 shares of XYZ at $10 per share. He can turn around and sell the common stock for $15 per share, and make a 50% profit. If, on the other hand, the market price of XYZ’s shares never exceeds $10 USD, Joe does not have to exercise the warrants. After 10 years, the warrants will simply expire.
Stock warrants are different from call options, which are short-term options to buy a security at a specified price. Call options are not issued by the corporation issuing the shares. They usually expire in a few months.
Smart Asset.
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