Special Securities Flashcards
What is a Warrant
- Long-term option to buy stock at price higher than market price when stock issued
- Typically attached to new stock issue to make more attractive
- Received as package unit with new issue purchase but can be traded by itself
- Usually includes period before can be exercised
- Typical lifetime of 5-10 years but can be perpetual i.e. dont expire
What does ADR stand for?
American Depositary Receipt
NOTE: The underlying shares are called American Depositary Shares
Warrants vs Rights - what is same?
Same:
- Can be traded
- Can be exercised to buy the underlying security
- Can be allowed to expire
Warrants vs Rights - what is different ?
Different:
Initial exercise price - rights are below market price, warrants are above market price
Expirations - rights have short-term expiry, warrants have long-term expiry
What are ADRs ?
Factilitate trading of foreign securities in the US.
It is a receipt that represents shares of a foreign company
How do ADRs operate?
A bank buys foreign stock and places it in trust in the country of origin.
The bank issues ADR which is backed by the securities held in trust
The ADR is registered with the SEC and sold in the US for US dollars
Rights of ADR holder vs ADR issuer
The ADR holder:
- receives dividend payments in US dollars via the bank
- does not have voting rights
- does not have preemptive rights
The bank:
- has voting rights
- has preemptive rights but sells them off and gives the money to the receipt holder
ADR currency risks
ADRS are bought and sold in US dollars
Dividends are paid in US dollars
But value can change due to exchange rate changes in foreign currency markets
Where are ADRs traded?
Issued by US banks
Listed on US and foreign exchanges
i.e. New York Stock Exchange, Nasdaq stock market, American stock exchange
Comply with US exchanges and US GAAP
