Along with other corporate exercises (such as bonus issue, right issue etc.), it is common for many listed companies to give free warrants at the same time. These warrants come at very little cost to issuing companies, and no direct costs to shareholders. Warrants can be transacted in stock exchange. it has actual monetary value and therefore used by many companies as “freebies” for subscripting corporate exercise, or as reward to shareholder, or to improve general interest on company’s stock.
What are warrants?
Warrants are a type of options, giving holders the right (but no obligation) to transact a company’s stock at a specific price, within a specified timeline in the future.
There are few types of warrants:
- Company warrants – Issued by listed companies, giving holders the right to buy stock of issuing company at a specified price in the future. Upon exercise, it will increase total number of shares (dilution effect). It is quoted as xxx-Wx in stock exchange.
- Structured warrants – Issued by eligible financial institutions. It does not affect number of shares in market upon exercise.
- Call warrants – right to buy a company’s stock at a specified price in the future, quoted as xxx-Cx in stock exchange.
- Put warrants – right to sell a company’s stock at a specified price in the future., quote as xxx-Hx in stock exchange.
Warrant does not present ownership of company shareholding, until it is exercised.
Pricing of warrants move along with stock price. Company warrant and call warrant pricing moves in line with share price, whereas pricing of put warrants moves in opposite direction of share price.
Advantages of using warrant investing are
- Inherent leverage characteristic
- Enable investors to make profit from falling share price
Why do companies issue free “company warrants”?
Why do companies issue “company warrants” for free?
- Potential source of capital in the future when investor exercises a warrant
- Reward to shareholders with little financial cost to company
- “Freebies” for corporate exercise subscription (such as IPO and right issue) to attract more investors
- To increase awareness and interest of investors on their stock, especially if the stock has low transaction volume
The end
Personally I do not invest in warrants, but did own warrants issued from stocks I owned. I’m only sharing the basics, so that you have a better idea what they are if you receive free warrants from stocks owned.
If you are interested to know more about warrants, bursamarketplace here could be a good reading material to start with.
I don’t invest in warrants too. But sometimes I receive company warrants which to me is just troublesome. There is no free lunch. With warrant there comes the potential dilution effects, which I have to consider when valuing the stock. I also have to decide whether to hold r to sell the warrants.
Based on the theory of option pricing, the price of a warrant should be affected by the price of the underlying mother share, exercise price, time to expiry and three other lesser factors. However, due to the lack of data and experience, I could not even get a rough estimate of the theoretical price of a warrant and therefore can’t judge whether it’s under or overvalued.
I notice usually warrants get sold down soon after given out, probably because some shareholders like me find them bothersome. However, this may open up some profit or arbitrage opportunities, for example by selling mother shares and buying back warrants, but only if one can determine the fair value of the warrants.
Any thought on this?