In this article, let us discuss 窩輪 in stock trading in brief.
What to understand about a Warrant in the stock market?
The concept of a warrant in the stock market is beneficial to both the buyers and sellers of the stocks. It means that a certificate of agreement between the two parties on a trade that is about to happen way forward. Before several days of actual trading, the buyer will issue a warrant to the seller stating his acceptance to sell the stocks at a particular price on the future date. The seller will pay a small fee for the warrant and will get it. Now, when the date arrives, the seller will see the actual price of that stock in the market and will compare it with that mentioned in the agreement. If the current value of the stock is higher, he will find it beneficial to buy those stocks from the seller at a discounted price mentioned in the warrant. However, when the stock’s value has been fallen, it will be a loss for him to buy those stocks through this warrant as he would have to buy them at the mentioned price. So, he will not use the warrant. In such a case, the seller will take the initial amount paid by the buyer for the warrant as his profit. So, both parties could find it beneficial.
Example of a warrant in stock trading
- What to assume?
- Let us think that there is a seller who is willing to create a warrant for his stocks at $100 for May 5th.
- Let the current price of the stock (on Feb 1st) be $50.
- A buyer is willing to sign the warrant on Feb 1st by paying $10 to the seller.
- The actual price of the stock on May 5th be $125
As the mentioned price of $100 is lower than the actual value of $125 on May 5th, it is beneficial for the buyer to use the warrant on that day. If he does so, he could get the stocks for a profit of $25.
- What to assume?
- In this case, let us assume that the warrant is signed for a stock at $100 to be valid on May 5th.
- The actual price of the stocks on May 5th is $75.
- A buyer has the warrant that he bought for $10 on Feb 1st
Here, the mentioned price in the warrant is higher than the actual price of the stock on May 5th. Hence, it will be a loss of $25 for the buyer if he goes for the warrant as the actual price at that time itself is $75 only. So, he will not use the warrant. As he is not using the warrant, the seller will hold the stocks for himself, along with that $10 the buyer gave him to sign the warrant. So, it is a profit of $10 for the seller.