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are very much like subscription rights in that they are usually used to purchase stock for less than what the stock is currently worth, or the
current market value.
Warrants are a type of financial instrument distributed by the company that originally issued the corresponding stock. The warrants grant the bearer the right to purchase that company's stock at a predetermined price, regardless of the market value of the stock at that time.
For example, suppose that you have just purchased 10 shares of XYZ Company stock at $10 per share. XYZ Company
But, in the course of time, the price of XYZ Company rises to $13 per share. By cashing in your warrants, you could buy 10 more shares of XYZ Company stock at the price of $11 per share, thereby making an immediate profit of $20 ($11 — 10 = $110, versus $13 — 10 = $130).
Let's say that when you purchased those 10 initial shares and received the warrants, you were satisfied because you really only wanted 10 shares to begin with. You figured the warrants were nice but relatively useless, right? No. As in the subscription rights example, you can sell or
I'm an investor who wants to purchase XYZ Company stock, so you offer to sell me your warrants for $1 each. I use your warrants to purchase XYZ Company stock at $11 per share, and I still save $10 ($11 — 10 = 110 + $10 = $120, versus $13 — 10 = $130). You've just made $10 by selling me something you didn't want to begin with, and XYX Company has attracted a new investor. Everybody's happy.
Many investors buy and sell warrants, completely ignoring the underlying stock, because oftentimes more money can be made from the warrant transactions. For example, let's say you bought those 10 warrants from me at $1 each. Instead of using them to buy stock, you hold on to them and wait until the price of XYZ Company stock climbs to $14 per share. You then find another investor who is willing to pay $2 per warrant. The advantage to the buyer is that he or she acquires the right to buy XYZ Company shares at the bargain price of $11 each. The buyer will still save $10 in the transaction ($2 — 10 warrants = $20 and $11 — 10 shares = $110; $20 + $110 = $130, versus $140 to purchase 10 shares at $14). The investor has saved money, and you have made $10 from your initial $10 investment, effectively giving you a 100-percent profit.
Of course, if the price of XYZ Company stock never rises above $11 per share, you've just bought a dog with fleas. Welcome to the wonderful world of investing.
Also, it should be noted that XYZ Company is not issuing warrants for the sake of being nice. As noted in the previous example, companies typically issue stock because they are relatively young and/or may have a difficult time otherwise
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