Stock warrants give you the right to buy shares in a company at a guaranteed price for a specified time, although there is no obligation to exercise the warrants. Once issued, warrants are negotiable securities traded on financial markets. The expiry, or expiration date, of a warrant is normally several years. Also, you don't have to pay a premium to an option writer to buy warrants since companies don't charge a fee when they grant warrants.
Find the exercise price stated on the warrants. If you don't have the physical document available, ask your broker. For example, an exercise price of $25 per share might be listed. If the stock's market price increases to more than $25 per share, the warrants are referred to as in the money. That is, you can exercise the warrants to buy the shares for $25 each, then sell the shares at the higher market price and make a profit. If the stock price is less than the exercise price the warrants have no value and, unless the price rises before the expiry date, will expire without being exercised.
Find the conversion ration for the warrants. It typically takes more than one warrant to purchase one share of a stock at the exercise price. The conversion ratio tells you how many warrants you need per share. For example, if a warrant has a conversion ratio of four to one, you need four warrants for each share of stock you wish to purchase. Again, the conversion ratio is stated on the warrants or you can ask your broker for this information.
Subtract the exercise price of the warrants from the market price of the stock to find the value of the warrants needed to buy one share. This is called the intrinsic value of the warrants. For example, if the exercise price is $20 per share and the stock is selling for $50 per share, the warrants needed to buy a share are worth $30. Divide by the conversion ratio to find the intrinsic value of a single warrant.
- Be careful not to use the market price of the warrants when calculating the value. The intrinsic value of the warrants refers only to the difference between the exercise price and the market price of the stock. If investors believe a company has good long-term prospects, they often bid the market price of the warrants up to a level greater than the intrinsic value.
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