Introduction

Welcome to Rights, Warrants, and ADRs, a unit covering three equity-related instruments that extend beyond ordinary common and preferred stock.

Exam Weight: Part of F3 (~18 equity questions est.)

What You'll Learn

In this unit, you'll cover:

• Preemptive Rights: Short-term instruments that let existing shareholders maintain their proportionate ownership when new shares are issued
• Warrants: Long-term instruments attached as sweeteners to bonds or preferred stock, giving holders the right to buy common stock at a fixed price
• Rights vs. Warrants: The critical comparison table the exam loves to test
• American Depositary Receipts (ADRs): How U.S. investors access foreign stocks through U.S.-traded certificates
• Foreign Ordinary Shares: Direct investment in non-U.S. equity and how it compares to ADRs

Why This Matters

Rights, warrants, and ADRs show up regularly on the Series 7 because they test your understanding of equity derivatives, dilution, and international investing. The exam frequently targets the differences between rights and warrants (especially their exercise prices relative to market) and whether ADRs eliminate currency risk (they don't). Mastering these instruments means understanding both the mechanics and the common traps examiners use.

Let's start with preemptive rights, the short-term instruments that protect existing shareholders from dilution.