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moneysense.ca, 30/07/07
Primer on Warrants
If you dabble in individual stocks (specifically small-cap stocks), eventually one of your holdings will offer you a warrant. A warrant allows you to buy a set amount of shares at a set price within a certain time period. Warrants are issued to entice investors to buy into an equity or debt offering by the company (putting lipstick on a pig) or to allow existing investors to increase their equity stakes.
If you receive a warrant, you have a few options:
- You can exercise the warrant by coming up with the cash for the extra shares. You simply have to call your broker with instructions and the one time I did this, there was no charge for the service.
- You can sell the warrants just like a stock and you’ll incur a trading commission. Obviously, this option makes sense only if you can net more than the trading commission.
- You can let the warrant expire if you don’t want to increase your stake or if the gross proceeds are less than your trading commission.
moneysense.ca, 30/07/07
What are the tax implications of receiving a warrant?
Mike
Mike: I have really done only #1, so don’t hold me to this answer. I’d imagine that there is no tax implication in receiving a warrant. #1 though will affect the ACB, so will affect capital gains/loss calculations. You will probably pay capital gains on the entire proceeds if you choose #2. #3 will have no tax implication. That’s my guess anyway!
I have done #1 and #2. If you are given warrants by the company and trade them, your cost is $0. If you buy and sell them on the market (ie trading), then your cost is what you paid for on the market. If you excercise the warrants, then your cost is the excercise price IF you were given the warrants by the company. If you bought the warrants on the market, then your cost is the cost of the warrants, plus the excercise fee.
For example, you might be able to buy warrants for 0.20 each. And this warrant will allow you to buy one of the underlying share for 0.85 for the next 2 years. Your cost would be 1.05 if you excercised. But if you were given the warrants as part of a private placement, then your cost would be 0.85.
Some warrants are tradeable on public exchanges, most are not.
There are some complicated valuation techniques for warrants as they have an intrinsic value and a time value. They are essentially long term call options.
warrants to me seem similiar to trading penny stocks…buy a warrant for a fraction of the shares price and sell at a higher price and potentially make a nice tidy profit…. welcome to the wonderful world of …derivatives investing