Stock warrants are issued by public companies to shareholders giving them the right to purchase more shares of the company at a specific price and by a specific time. The warrant holder would have to exercise their right to buy more shares which in turn would increase the total number of outstanding shares of the company. Warrants are a great way for companies to solicit investors to participate in their private placement or shelf offerings.
Features of Stock Warrants
Stock warrants are often attached when a company is looking to raise money either via equity or bonds. The warrants make it more attractive for investors to participate in the company’s offering. Common features of warrants are:
- Warrants dilute the share count and increase the total number of shares outstanding
- The exercise price or the price that warrant holders are entitled to exercise the warrants are pre-determined ahead of time
- Warrants do not provide the holder with any additional voting or dividend rights, unless exercised
- Warrants are not typically listed on a stock exchange but you will find certain companies that might
Usefulness of Stock Warrants
Typically, the underlying stock in the warrant is also the common share of the issuer. When a holder exercises their warrant, they provide capital to the company and in return receive additional shares. This capital can help the company expand operations or conduct new business.
Investors prefer warrants as it aligns the interest of management with the interest of the shareholders. Warrants often have an exercise price above the stock price “at issue” meaning that the warrant holder will not exercise their option until the share price has passed a certain threshold.
Certain warrants may be traded on a public exchange for a premium. The longer the date of expiry, the higher the premium. As the expiration date approaches, the premium would get reduced. In addition, if the common share of the publicly traded warrant is higher than the exercise price, the more expensive the warrant would be.
However, it’s important to note that trading warrants can be difficult and time consuming if they’re not listed on an exchange. You may have to get a lawyer and complete paperwork. Let the company know ahead of time if you’re trading your private stock warrants with another individual. They may provide advice and guide you throughout the process.
Example of Stock Warrants
‘Toronto Company’ which trades under the symbol TCD on the Toronto Stock Exchange is looking to expand their Hydro division. They determined that they needed to raise $2,500,000 to do this and recently had a private placement of $2,500,000 at $0.25 per share. Participants in this private placement would be entitled to 1 warrant at $0.40 expiring on December 2023
James was interested in participating in the private placement where the company was hoping to raise $2,500,000 for the purpose of expanding their Hydro division. James provided the company with a $50,000 cheque and in return the company gave James, 200,000 shares. ($50,000 / $0.25). In addition to 200,000 shares, James also received 200,000 warrants which enable him to purchase 200,000 additional shares at a price of $0.40 before December 2023
A year later, the price of the stock was $0.80. James wanted to exercise his warrants and provided “Toronto Company” with a $80,000 cheque for which they could use towards their business operations. (200,000 * $0.40). As James exercised his warrants, he ends up with 200,000 shares of TCD. If he wishes to do so, James could sell his 200,000 shares for $0.80 which is the price that stock is trading at.
As you can see warrants are a great way to increase your net worth as they allow you to purchase shares at a discount. The important thing to note is that you must have the applicable funds to exercise the warrants.