Exercise of warrants
A company issues warrants because it has a need to raise capital. The most common method of issuing warrants is through a unit issue. A unit may consist of one or more shares together with one or more warrants.
The holder of a warrant has the right to subscribe for new shares in the company at a future date. To enable the exercise of warrants into shares, the company sets a specific exercise period, during which warrant holders may choose to exercise their warrants. The exercise request is submitted to the bank or custodian where the warrants are held.
All terms and conditions applicable when subscribing for new shares are determined at the time the warrants are issued. A warrant exercise can be viewed as a simplified share issue, where the terms have been set in advance.
“In the Money” or “Out of the Money”
Investors must assess whether it is financially beneficial to exercise their warrants during the exercise period.
- If the market price of the share exceeds the exercise price, the warrant is considered “in the money”.
- If the exercise price exceeds the current market price of the share, the warrant is considered “out of the money.”
In short: if you wish to increase your shareholding, it is cheaper to exercise your warrants rather than buy shares on the market when the warrant is “in the money.”
Converting Warrants into Shares
The terms and conditions for the warrants can be found on the company’s website and in the memorandum/prospectus or equivalent investment documents related to the previous unit issue (where the warrants were originally issued). These documents specify the dates during which warrants may be exercised, as well as the applicable exercise price.
The exercise price is not always predetermined; in some cases, it may be calculated using VWAP (Volume-Weighted Average Price) based on the development of the share price shortly before the exercise period.
During the predetermined exercise period, warrants may be converted into shares by notifying the bank or custodian holding the warrants that you wish to exercise them.
If the warrants are listed, they may also be bought or sold on the market. If the warrants are not exercised or sold before the end of the exercise period, they expire worthless and no compensation is provided.