Quick Answer
Preemptive (subscription) rights are short-term and let existing shareholders buy new shares below market to avoid dilution. Warrants are long-term sweeteners attached to bonds or preferred stock, priced above market at issuance. American Depositary Receipts (ADRs) let U.S. investors hold foreign stock in dollars but keep currency risk.
The whole unit on one sheet: short-term rights below market, long-term warrants above market, and how ADRs package foreign equity into dollars.
Rights vs. Warrants at a Glance
- Preemptive right (subscription right): short-term, granted to existing common shareholders by the corporate charter; subscription price is set below market; one right per share owned; expires in 30 to 90 days.
- Warrant: long-term, attached as a sweetener to bonds or preferred stock; exercise price starts above market at issuance; lasts 2 to 5 years or longer, sometimes perpetual; requires stockholder approval.
- Neither is stock: no voting rights and no dividends until exercised. Both are transferable, and both create new shares on exercise.
| Feature | Rights | Warrants |
|---|---|---|
| Duration | Short-term (30-90 days) | Long-term (2-5+ years, sometimes perpetual) |
| Exercise price vs. market | Below market (in the money) | Above market (out of the money) |
| Issued to | Existing shareholders | Purchasers of bonds or preferred stock (sweetener) |
| Purpose | Maintain proportionate ownership | Make another offering more attractive |
| Dilutive? | Anti-dilutive if exercised by existing holders | Dilutive (creates new shares for non-shareholders) |
| Source authority | Corporate charter | Stockholder approval |
The One-Liners That Win Points
- Rights start below market; warrants start above market. This price direction is the trap the exam plants most.
- Rights holders can exercise, sell on the secondary market, or let them expire worthless.
- Standby underwriter buys any unexercised shares on a firm-commitment basis, guaranteeing the issuer raises the full amount.
- Warrants have intrinsic value = Market Price minus Exercise Price (when positive); out of the money, they still carry a time value premium.
- ADR = a negotiable certificate from a U.S. depositary bank representing shares of a foreign company; it trades on U.S. markets in U.S. dollars.
- Only Level 3 ADRs can raise new capital through a U.S. public offering; Levels 1 and 2 only trade existing shares.
- ADR dividends are declared in foreign currency, then converted to dollars by the depositary bank.
Numbers to Lock In
| Item | Value |
|---|---|
| Rights per share owned | 1 right per share |
| Rights duration | 30 to 90 days |
| Subscription price | Below current market price |
| Warrant duration | 2 to 5 years or longer (some perpetual) |
| Warrant exercise price at issuance | Above current market price |
| Cum-rights value | (Market - Subscription) / (Rights Needed + 1) |
| Ex-rights value | (Market - Subscription) / Rights Needed |
| ADR ratio | 1 ADR = one, a fraction, or multiple foreign shares |
Memory Aid: Rights vs. Warrants
- Rights = Retain ownership (existing shareholders, below market, short-term)
- Warrants = sWeetener (bond buyers, above market, long-term)
For the value formulas: "Cum" means with, so add 1. "Ex" means without, so no +1.
Top Gotchas
- Subscription price is below market. A subscription price above market gives rights no intrinsic value; this is the opposite of warrants, which start above market.
- Rights are short-term (30-90 days); warrants are long-term (2-5+ years or perpetual). The two are constantly confused.
- Warrants are dilutive because exercise creates new shares, unlike a secondary-market purchase that just transfers existing shares.
- Neither rights nor warrants holders are stockholders until exercise, so no dividends and no voting until then.
- ADRs do NOT eliminate currency risk. They remove foreign exchanges, brokers, and settlement, but exchange-rate swings still move the ADR's value.
- Neither ADRs nor foreign ordinary shares eliminate currency risk. Foreign ordinary shares trade in the local currency; ADRs add convenience, not safety.
- Foreign tax withheld on ADR dividends may qualify for a U.S. foreign tax credit, so the investor does not simply lose it.
- Unsponsored ADRs trade OTC only with minimal SEC oversight and usually pass no voting rights through.
One-Breath Recap
Rights are short-term and priced below market so existing shareholders can hold their proportionate ownership, while warrants are long-term sweeteners priced above market at issuance; neither is stock until exercised, and both create new shares. ADRs let U.S. investors buy foreign companies in dollars on U.S. markets, but currency risk stays, just as it would with foreign ordinary shares. Lock in the below-versus-above price direction and the ADR currency trap and this unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Rights, Warrants, and ADRs unit for the complete lesson.