SIE (Training Consultants v3.5, 2025): Ch. 1 Equity Securities, Sec. 5 - Equity Security Derivatives

Equity Security Derivative

A security that derives its value from the value of an underlying common stock.

Warrant / Subscription Warrant (WTS)

A long-term option issued by a company to buy its stock at a specified price; transferable and may be traded separately from the attached security.

Market Premium (Warrants)

The amount by which the market price of the stock exceeds the exercise price of the warrant.

Debenture

An unsecured bond; warrants are often issued with debentures to make new issues more attractive.

Dilution

An increase in the total number of outstanding shares, which decreases the earnings per share (EPS); exercising warrants causes dilution.

Preemptive Rights / Subscription Rights / Rights (RTS)

A short-term privilege allowing existing shareholders to purchase a proportionate number of newly issued shares at a discount before the public.

Preemptive Rights Clause

A clause in a corporation’s charter requiring that existing shareholders be offered preemptive rights when new shares are issued.

Rights Offering

Distribution of subscription rights to existing shareholders; one right is given per share of common stock held.

Rights Holder Options

Shareholders may use, sell, let expire, or gift their rights; rights cannot be redeemed for cash with the corporation.

Number of Rights Required per New Share

Calculated by dividing the number of outstanding shares by the number of new shares to be issued.

Equity Option

A contract giving the buyer the right to buy or sell shares of the underlying stock at a set price within a specific period.

What is an equity security derivative?

A security whose value is derived from an underlying common stock.

What is a warrant?

A long-term option issued by a company to buy stock at a specified price; transferable and often traded separately.

When do warrants have a market premium?

When the market price of the stock exceeds the exercise price of the warrant.

Do warrants pay dividends?

No, dividends are not paid on warrants.

What is dilution in the context of warrants?

An increase in outstanding shares that decreases EPS; exercising warrants causes dilution.

What are subscription rights?

Short-term privileges allowing existing shareholders to purchase newly issued shares at a discounted price before the public.

What is the preemptive rights clause?

A clause in a corporation’s charter requiring existing shareholders to be offered preemptive rights when new shares are issued.

How many rights are generally issued to a shareholder?

One right per share of common stock held.

What can a shareholder do with rights?

Use them to subscribe to new shares, sell them, let them expire, or gift them to another investor.

Can rights be redeemed for cash with the corporation?

No, shareholders cannot redeem rights for cash.

How do you calculate the number of rights needed to purchase one new share?

Divide the number of outstanding shares by the number of new shares to be issued.

What is an equity option?

A contract giving the buyer the right to buy or sell shares of the underlying stock at a set price within a specified period.