Warrants and convertibles

Security

Convertibles and warrants are securities offered by companies to attract investors and raise finance.

Convertibles

Convertibles are long-term securities which can be changed into another type of security, such as common stock. Convertibles include bonds and preferred shares, but most commonly take the form of bonds.

Convertibles are attractive to investors who are looking for an investment with greater growth potential than that offered by a traditional bond. By purchasing a convertible bond, the investor can still receive returns as if it were a traditional bond, but has the additional option of converting that bond into shares if the share price increases enough to make it worthwhile.

Warrants

Warrants are also long-term securities but are generally shorter-term than convertibles. They grant investors the right to purchase shares at a fixed price (known as the "exercise price") for a predetermined amount of time, often several years.

Warrants are often tied to bonds or preferred stock, but can also be issued independently.

The exercise price is usually higher than the price at which the shares for the company are currently trading, but if those shares then increase in value, the investor will still be able to purchase at the exercise price.

Warrants are more valuable in volatile markets when chances of the price swinging above the exercise price are good. They become less valuable as the warrant expiration date approaches because the chances of a favourable price swing are greatly reduced.

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