Warrants

Warrants are securities offering the owner the right to subscribe for the ordinary shares of a company at a fixed date and price, and are also used in warehousing as proof for deposited goods.
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Definition

Warrants are bifurcated into two main categories:

  1. Share Warrant: A security that grants the holder the right to purchase ordinary shares of a company at a specific price, known as the exercise price, before or on a fixed date. These warrants are traded on stock exchanges and offer a speculative investment, often at prices higher than the current market value of the shares. This type of warrant is similar to stock options but does not typically appear on the company’s balance sheet.

  2. Warehouse Warrant: A document that serves as proof of ownership for goods stored in a public warehouse. These documents can be endorsed and transferred, often used as collateral security for bank loans. Types such as dock warrants or wharfinger’s warrants are specific to warehouses affiliated with wharves.

Examples

Example of a Share Warrant

  • ABC Limited issues share warrants: ABC Limited issues warrants allowing investors to purchase its ordinary shares at $50 per share within the next two years. The current market price of ABC Limited’s shares is $45. Investors purchase the warrants hoping the share price rises above $50 within the stipulated period, providing them with a profitable exercise price.

Example of a Warehouse Warrant

  • Warehouse Warrant as Loan Collateral: A company stores a large quantity of grain in a public warehouse and receives a warehouse warrant. The company uses this warrant as collateral to secure a bank loan, providing the necessary proof of the grain deposited.

Frequently Asked Questions

1. Are warrants similar to options?

  • Yes, both give the holder the right to buy shares at a specific price before a stated expiration date. However, warrants typically have longer durations and are issued by the company itself rather than an exchange.

2. Can warrants be traded independently of the shares?

  • Yes, warrants can be bought and sold separately from the underlying shares on the stock exchange.

3. What happens if the exercise price of a warrant is not met before expiration?

  • The warrant becomes worthless if the exercise price exceeds the market price at expiration.

4. Are warehouse warrants transferable?

  • Yes, warehouse warrants can be transferred by endorsement and are often used as collateral for loans.
  • Options: Derivatives that represent a contract sold by one party to another, offering the buyer the right, but not the obligation, to buy or sell a security at an agreed-upon price during a certain period or on a specific date.
  • Convertible Debentures: Bonds that can be converted into a fixed number of shares of the issuing company, combining both debt and equity features.
  • Call Option: A financial contract giving the buyer the right to purchase an asset at a specified price within a specific time frame.
  • Put Option: A financial contract giving the owner the right to sell an asset at a predetermined price within a specific period.

Online References

  1. Investopedia – Warrants
  2. The Balance – Understanding Share Warrants
  3. Corporate Finance Institute – Warehouse Receipts and Warrants

Suggested Books for Further Studies

  1. “Options, Futures, and Other Derivatives” by John C. Hull
  2. “Financial Instruments: Equities, Debt, Derivatives, and Marketing” by David M. Weiss
  3. “Understanding Options” by Michael Sincere

Accounting Basics: “Warrants” Fundamentals Quiz

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