Warrants Definition and Risks
Subscription warrants (better known simply as “warrants”) give the holder the right, not an obligation, to purchase additional securitiesA security is a financial asset issued by a company or a government that grants interests in a business or in a debt obligation and that can be bought or sold.
Here are some examples of securities:
Treasury billGuaranteed Investment Certificate (GIC)Savings bondSharesEtc. (such as sharesA share, also referred to as stock, is an equity security that entitles you to an ownership interest in a company.
The company can distribute a portion of its earnings to shareholders by paying them a dividend.
The shares of companies listed on an exchange are bought and sold at the exchange.
When a company ceases to operate, the proceeds from the sale of its assets are used to pay its debts and taxes, and the rest of the money is distributed to shareholders.) from the issuer at a specified price and within a specified period. Warrants are often “attached” to preferred shares or bonds by the issuer when it makes a new issue.
The return consists of capital gains (or losses).
Warrants can sometimes be exercised before expiration. Their value will depend on the time remaining before expiration and the return the investor is looking to obtain. The market value of a warrant tends to decrease the closer it is to expiration, particularly if the warrant’s strike priceAn option’s strike price is the price at which a share, commodity, currency or market index underlying an option (underlying interest) can be purchased (in the case of a call option) or sold (in the case of a put option). is higher than the price of the underlying interestAn underlying interest is the asset upon which a derivative (call or put option, futures, etc.) or other investment (such as exchange-traded funds) is based and that influences its value. The underlying interest may be a stock, an index, a currency or a commodity. (shares or bonds). In such a case, there is little time left for the value of the underlying interest to increase.
If the strike price of a warrant remains higher than the value of the underlying interest, its value is nil.
Warrants can be traded on an exchange. As a rule, they can be resold without difficulty.
If the warrants are not traded on an exchange, there may not be a market for their resale. Some warrants cannot be resold.
Medium to high. The risk depends on the underlying interest and how the warrant is used.
- If it is used for hedgingHedging consists of making an investment to offset possible losses on another investment.
For example, an investor who owns shares could buy a put option on the shares they hold. This way, if the shares decline in value, the investor can exercise the option to offset the decrease in the value of the shares. purposes, the risk is reduced.
- If it is used for speculation purposes, the risk is high.
An investment in warrants is more suitable for sophisticated investors.