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 side-by-side comparison of the two instruments
- 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 are core equity instruments covering derivatives, dilution, and international investing. The key distinctions to master are the differences between rights and warrants (especially their exercise prices relative to market) and the fact that ADRs do not eliminate currency risk. Understanding both the mechanics and the common traps is what makes these instruments manageable.
Let's start with preemptive rights, the short-term instruments that protect existing shareholders from dilution.