Warrants are a type of security issued by companies and traded in the market, much in the way that shares are. But rather than give you equity directly, a warrant gives you the right to buy new shares in a company for a fixed price at a fixed date in the future. This price, the subscription price, will be fixed above the prevailing share price on the issue date so that initially, you are paying only for the possibility that the share price might rise above the fixed price.
Suppose, for example, that a warrant is issued that gives the right to buy shares in a year at 150p. If the shares currently trade at only 100p, there is no intrinsic value in the warrant, only 'hope value'. If the share price stays below 150p, there is no point in subscribing for the shares. If, however, the share price rises to 200p, there is clearly value in owning the right to buy shares at 150p, and in buying the shares when you are able to. The price of the warrant in the market will rise to reflect this.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Is it time to ride the recovery in emerging markets?Interview What's the outlook for emerging markets? Gustavo Medeiros, head of research at Ashmore Group, gives his analysis and reviews progress in developing economies
-
Could the Enterprise Investment Scheme cut your tax bill?The Enterprise Investment Scheme is tax-efficient and potentially lucrative. Taking a chance on the scheme could trim your family’s IHT bill, says David Prosser
