Warrant Coverage (Stock) - Explained
What is Warrant Coverage protection to Existing Shareholders?
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Table of ContentsWhat is Warrant Coverage?How is Warrant Coverage Used?Reasons for Warrant CoverageReferences for Warrant Coverage
What is Warrant Coverage?
A warrant coverage is an assurance that one or more shareholders of a company can increase their holdings if the value of the company increases. This warrant coverage is offered when a company agrees with one or more of its shareholders that they can purchase additional shares at a certain price.
Usually, a warrant coverage is an additional benefit offered to one or more shareholders at the purchase of common stock of a company. This warrant serves as a guarantee that when the company increases in value, these shareholders can buy more shares at a stipulated price.
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How is Warrant Coverage Used?
The holder of a warrant coverage has the right but not obligation to buy additional stocks are certain prices before they mature. Companies make agreement with some of their investors that they will be issued warrants as a way to harness their full participation and cooperation in the growth of the company.
When investors are assured of warrants, they become more vested in the increase in value of the company. Although warrants are similar to options, they differ in certain ways. Unlike options that are offered by traders in the market, warrants are issued by the company. Also, when shareholders have the opportunity to exercise their warrant coverages, new stocks issued by the company are purchased at a designated price and not old stocks. It is however important to note that the fact that a company agrees to offer one or more shareholders warrant coverage does not mean the shareholders are entitled to any downside protection.
Reasons for Warrant Coverage
There are many reasons companies offer warrant coverage to some of their investors, the most significant one is to enhance the maximum participation of investors in the growth of the company. When investors are assures of warrant coverage if the value of the company increases, they are more devoted in seeing the company grow. Another reason for warrants is for companies to attract more investors, thereby realizing sufficient capital for business. Many companies in 2008 used warrants as a way of attracting more capital, this was the period of financial crisis. Here are some vital points to note about a warrant coverage;
- One or more shareholders benefit from warrant coverage and not all shareholders.
- Warrant coverage gives its holders the right and not obligation to buy additional shares at a specific price. This means they have the opportunity to gain more ownership of the company in question.
- Warrant coverages are similar to shares, only that shareholders can acquire more shares at designated prices.
- It is an agreement between the company and one or more shareholders.
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