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Warrants

See Also:
Common Stock Definition
Purchase Option
Call Option
Put Option
Synthetic Stock

Warrants Definition

The warrants definition is the right to purchase shares or bonds at a fixed price before there is an issuance in the public marketplace. In this sense, a warrant is like a call option. But there are several key differences.

Warrants Explained

Warrants are often used in finance and investing to make a deal better or provide a premium to potential investors in the company. The ability to buy an asset at a fixed price is a huge benefit if the price is higher because an investor can instantly see a profit. Like options, they expire after an allocated amount of time has passed. However, a warrant expiration could be years in the future as opposed to months, which is common for options.

Another large difference between warrants and options is that a warrant grants the right for an investor to buy stock or bonds before they are issued to the public market. This is why many private equity holders contain warrants. If the company has been a successful venture and is ready to issue an IPO, then the private equity holders have the ability to buy stock before the issuance. This right is a huge benefit if an investor sees a company with great potential. As a result, the investor can turn a huge return on investment.

Warrants Example

For example, Wawadoo Co. is a private company that is looking for investors to fund its newly developed product known as the widget. Widgets are considered the future in the market. And Wawadoo believes they will be a huge success. To incentivize private equity holders, Wawadoo has attached stock warrants in relation to the amount of money invested. The warrants have a life of five years. After three years, the widget has been such a success that Wawadoo is ready to enter into the public marketplace by offering an IPO. As this is happening, the private equity group has exercised its warrant. Thus, Wawadoo must honor the warrant. So, they provide the equity group a stake in the newly offered shares in the market before the actual IPO.

Warrants

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Treasury Stock

Treasury Stock Definition

The treasury stock definition is the shares a company buys of its own stock on the open market. Shares of treasury stock were issued by the company, and then repurchased. So consider it issued, but not outstanding. After a company repurchases shares of its own stock, there are fewer shares of its stock trading on the open market.

Treasury stock can either be retired (cancelled) or resold on the open market. In addition, the shares have no voting rights, and they do not pay or accrue dividends. It is not included in financial ratios that use the value of common stock.

Treasury Stock on the Balance Sheet

Record treasury stock in the owner’s equity section of the balance sheet. Then record it at cost – what the company paid to acquire the shares – and subtract the value of the treasury stock from the stockholders’ equity account. The treasury stock account is a contra-equity account.

Stock Buyback (Repurchase Shares; Buyback Shares)

There are several reasons why a company would repurchase its own shares, including the following.

1. A company might buyback shares if it considers its stock undervalued. If the stock is undervalued, then management might want to buy shares because they consider them cheap.

2. Fewer outstanding shares increase the value per share, so a company might buyback shares to benefit its shareholders. For tax reasons, a share buyback can be superior to paying dividends to shareholders. (Depending on the difference between the tax rate that applies to dividends and the tax rate that applies to capital gains.)

3. A company can also repurchase shares to exercise stock options or to convert convertible bonds.

4. You can use stock buyback to thwart a takeover – if a company buys its own stock, then that stock is no longer available to the potential acquirer.

5. A company can alter its debt-to-equity ratio by issuing bonds and using the proceeds to repurchase stock.

6. A stock buyback could also be a sign that the company has excess cash and no other viable investment opportunities.

Treasury Stock Definition

See Also:
Convertible Debt Instrument
Common Stock Definition
Reverse Stock Split
Preferred Stocks
Hedging Risk
Private Placement

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