Compare the features of stock options and stock rights. What are stock warrants?
Stock Rights
Like stock options, stock rights give their holder the right to acquire shares of stock at a specified price. The major differences between stock options and stock rights are as follows: Firms grant stock options to employees. Employees receive them as a form of compensation and in general may not transfer or sell them to others; therefore, they do not trade in public markets.
Firms grant stock rights to current shareholders. Shareholders may exercise the stock rights or sell them to others. The rights usually trade in public markets.
Firms often issue stock rights to raise new capital from current shareholders. The granting of stock rights to current shareholders requires no accounting entries. U.S. GAAP and IFRS do not require recognition of the rights on the date of the grant. When holders exercise the rights, the firm records the issue of shares at the price paid just as it records the issue of new shares for cash.
Stock Warrants
Firms issue stock warrants to the general investing public for cash or attached to bonds.
Holders of a bond or preferred stock with common stock warrants attached can detach and redeem the warrants separately from the bond or preferred stock. The holder receives periodic interest or preferred dividends and holds a call option to purchase common shares. U.S. GAAP and IFRS require the firm to measure the fair value of the stock warrants separately from the value of the associated bond or preferred stock and allocate the issue price between the two securities.
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