Stock Warrants & Stock Rights

Typically, a certain number of rights may be used to buy a share of common stock at a specified price that is often lower than the current market price.

Stock warrants provide the opportunity to purchase common stock for a specified period, usually one to five years. Rights typically have a shorter expiration than warrants. Stock warrants are similar to stock rights, but warrants typically have an exercise price above the current market price.

Stock rights and warrants protect current shareholders from dilution of ownership when the company issues new shares of stock.

Stock rights and warrants are offered directly from the company, so it is difficult to find offerings and pricing for the instruments. Various third parties offer lists of warrants and rights, but these sources can be inaccurate. The most reliable method is to call the company's investor relations department.

Rights and warrants are similar in many ways to call options, but rights and warrants are usually only issued to current shareholders. Call options give the buyer the right, but not the obligation, to buy an underlying asset at a specific price on or before a specific date.

When an option is exercised, the option seller must deliver shares to the call option buyer. When a stock right or warrant is exercised, the company directly issues the shares of stock to the right or warrant holder. In this way, rights and warrants are a source of capital for corporations.

FAQs

What are stock subscription rights?

Stock rights provide current shareholders with the opportunity to purchase shares of a company’s stock to preserve the shareholder’s ownership interest in the company for a specified period of time. Rights offerings are the sale of new shares of common stock to rights holders. Typically, a certain number of rights may be used to buy a share of common stock at a specified price that is often lower than the current market price.

How does rights issue affect share price?

Because more shares are available to the public at a discounted price during a rights issue, the share price will typically decline because the market is diluted with new shares of the stock.

What happens when stock rights expire?

Rights and warrants are similar in many ways to call options. Unlike call options, the stock right may not be exercised if it is in-the-money at expiration. Stock rights that are not exercised will expire worthless at expiration. If the stock right is in-the-money, the holder may choose to exercise the right or sell it to another investor or in the secondary market.

Are stock warrants good or bad?

Stock warrants are neither good nor bad; they simply allow current shareholders to purchase additional shares of stock for a discounted price while maintaining ownership in the company.

Why do companies issue warrants?

Stock rights and warrants are two alternatives for corporations to raise capital. Rights and warrants allow investors to purchase additional shares for a discounted price directly from the issuing company. Companies may issue rights and warrants to existing shareholders to raise capital for various reasons, such as restructuring or making an acquisition.

What is the difference between a stock and a warrant?

Stock rights and warrants are two alternatives for corporations to raise capital.

Stock rights provide current shareholders with the opportunity to purchase shares of a company’s stock in order to preserve the shareholder’s ownership interest in the company for a specified period of time. Rights offerings are the sale of new shares of common stock to rights holders. Typically, a certain number of rights may be used to buy a share of common stock at a specified price that is often lower than the current market price.

Stock warrants provide the opportunity to purchase common stock for a specified period, often one to five years. Rights typically have a shorter expiration than warrants. Stock warrants are similar to stock rights, but warrants typically have an exercise price above the current market price. Stock rights and warrants protect current shareholders from dilution of ownership when the company issues new shares of stock.