Some companies give out warrants when they issue new shares. They are usually issued free as an incentive to investors to buy the new shares, and are most popular with investment trusts.
Example
Goodco issues new shares at 50p each. At the same time it gives shareholders warrants entitling them to buy shares at 100p at any time until 1st January 2005.
Warrants have no right to dividends and no voting rights, so their value is tied entirely to the relationship between their exercise price and the share price of the company.
If the share price is below the exercise price, the warrants are said to be 'out of the money' and they are worthless. If the share price rises above the exercise price, they are 'in the money' and worth something.
Example
Goodco's share price rises to 150p. The intrinsic value of the warrants is now 50p (150p less 100p)
Note that one of the features of warrants is 'gearing'. This means that a small rise in the price of the share price results in a large rise in the value of the warrants, and a fall in the share price has an equally dramatic downward effect on the value of the warrant.
Example
Goodco's share price rises 33 per cent from 150p to 200p. The intrinsic value of the warrant rises from 50p to 100p (a 100 per cent rise).
Warrants are tradable instruments in their own right. You can buy and sell them. They are a risky investment because their value is so volatile and can descend to zero.
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