Welcome to the Investors Trading Academy talking
glossary of financial terms and events.
Our word of the day is “Warrant”
Corporations may issue warrants that allow
you to buy a company's stock at a fixed price
during a specific period of time, often 10
or 15 years, though sometimes there is no
expiration date.
Warrants are generally issued as an incentive
to investors to accept bonds or preferred
stocks that will be paying a lower rate of
interest or dividends than would otherwise
be paid.
How attractive the warrants are — and so
how effective they are as an incentive to
purchase — generally depends on the growth
potential of the issuing company.
The brighter the outlook, the more attractive
the warrant becomes.
When a warrant is issued, the exercise price
is above the current market price.
For example, a warrant on a stock currently
trading at $15 a share might guarantee you
the right to buy the stock at $30 a share
within the next 10 years.
If the price goes above $30, you can exercise,
or use, your warrant to purchase the stock,
and either hold it in your portfolio or resell
at a profit.
If the price of the stock falls over the life
of the warrant, however, the warrant becomes
worthless.
Warrants are listed with a "wt" following
the stock symbol and traded independently
of the underlying stock.
For example, if you own warrants to purchase
a stock at $30 a share that is currently trading
for $40 a share, your warrants would theoretically
be worth a minimum of $10 a share, or their
intrinsic value.
