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Company warrants (Warrant terminology (Warrant price (The price set by the…
Company warrants
Warrant terminology
Warrant price
The price set by the issuing company and must be paid by the existing shareholder to that issuing company for a warrant that gives the right to buy new shares at the stetted exercise price at some time in the future
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Exercise price
That price at which a warrant holder may purchase the new ordinary shares from the company by exercising the warrants
Exercise date
The fixed date or specific period within which a shareholder must exercise a warrant to buy the new shares
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Intrinsic value
The difference between the current market price of the underlying share and the future exercise price of that same share
Investors will want the market price of the relevant equities to be higher than the stated exercise price at the time of exercise in order to make a profit
Time value
Equal to the warrant price minus the intrinsic value of that same warrant. This reflects the amount that investors are wiling to pay for possible future share price rises
Warrant premium
Indicates the cost to the investor of two alternatives: buying a share directly in the equities market or paying for the warrant and subsequently exercising the warrant at the exercise price
Equal to the warrant price plus exercise price minus the current market value of the share. This is then exercised as a percentage of the current market price
Gearing
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The warrant price tracks that of the underlying share but the price movement of the warrant in percentage terms can greatly exceed that of the underlying share
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A security that entitles the holder to buy shares in the issuing company on a specific date or within a specific period and price
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They are stand alone leveraged securities with both buying and selling prices being made available form brokers and stock exchanges
Fully negotiable securities issued by a company over its own shares to its existing shareholders. They are not shares in themselves but give the holder the right without obligation to buy new ordinary shares in the issuing company which will be created by the company at some point in the future
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When exercised, raise additional capital for the issuing company and result in new shares being created at a specified time in the future
The exercise of warrants is a form of share dilution as there will be more shares created. If an existing shareholder wishes to maintain an existing percentage stake holding in the company then additional capital must be provided by subscribing for the new shares in line with the terms and conditions of the warrants
The expiry date stated on the warrant is the last date on which it may be covered into new ordinary shares
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The issuing company sets the warrant price which is derived form that of the company's own underlying share price
Once trade on the secondary market, the forces of supply and demand will determine the warrant price
Tend to be instruments of bull markets (where investors believe the price of the underlying share will rise and will buy in the hope of being able to sell at a higher price)
Considered to be high risk investments although there is potential for considerable gain there is also the possibility of total loss if they are not exercised. The loss is limited to the cost of the warrant itself
Have no income tax implications as they produce no income and so are suitable for higher rate taxpayers
Considerable prospects of capital gains (and potential CGT liability). Warrant holders can sell in the secondary market or exercise warrants or allow them to expire if there is no intrinsic value
Stamp duty land tax and other commissions would be payable in the event that the warrants are exercised to acquire the shares
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The FCA states that investors must sign a warrants risk notice before trading in warrants in order to confirm their understanding of the product and the inherent risks
Can become worthless if it is obvious that there is little likelihood of an appropriate price rise in the underlying share and the exercise price is greater than the market price of the share