Warrants

May 7th 2016

Overview

A warrant is a certificate issued along with a stock with the designation of the holder. It mentions the amount of securities the holder should buy at a specific price. This price is usually above the current market price at the time of sale. They are much like stock options that give you the right, but not obligated to adhere to the agreed upon terms. Companies commonly offer these warrants. Warrants often provide a certain level of security and confidence to the investors. This is especially true if the value increases over a certain amount of time. If the price of the security rises above the exercise price of your warrant, then you can buy the security at the current exercise price and resell it for a profit.

How It Works

You can buy or sell a warrant like you do with stocks. A call warrant is a contract that lets you buy a fixed quantity of shares at a specific price. Put warrants entitle the holder to sell a fixed quantity of shares at a given price. A warrant that can be exercised at any time until the date of expiry is called an American warrant, and a warrant that can be exercised only at the date of expiry is called a European warrant.

Benefits

One of the biggest benefits of investing in warrants is the ability to have much more control over your investment. This is because the terms of the warrant will offer certain rights for buying and selling the shares. For example, a warrant can include an agreement that allows you to purchase a certain amount of shares at a certain price, on or before an agreed upon date. This agreement can be quite beneficial to you and may tempt you to purchase more number of shares from a company.

Cost/Pricing

Company warrants are traded like shares and are charged at normal commission rates. As the prices of warrants are low, the leverage and gearing offered by them is high. This means the percentage in gain or loss will vary significantly though the share price and the warrant price move in parallel.

Timing

The time of your investment plays a very important role while using a warrant. This is because the different terms included in warrants will vary greatly depending on market conditions. You can enjoy all the advantages of a warrant if you invest in it at the right time.

Failing to consider the timing might result in agreeing to terms of a warrant that are not desirable. If you are new to purchasing shares with warrants, the best thing you can do is carefully consider all your options and take as much time as you need to ensure that you make a wise decision. Sometimes it can be beneficial to wait in order to get the maximum advantage of a warrant on a specific stock.

Companies/Industries

When you agree to the terms of warrants for the stocks that you are purchasing, you will be doing so with the issuer of the stock. This is the reason the reputation of the company that you are considering investing in, will usually determine the amount of trust you place in the investment. It is important to take an appropriate length of time to make sure you have researched on the history of stock trading and the company involved in issuing warrants.

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