Types Of Stocks
Ordinary Stocks :
When purchasing an ordinary stock, you own a share of the company. This entitles you to receive profits from the operations of the company in the form of dividends. At the annual general meeting (also referred to as an AGM), you have voting rights. Ordinary stocks are what you will start to trade in and most traders never venture beyond this.
There are, however, other types of securities and these are:
Preferential Stocks : A preference stock is different from an ordinary stock. Preference stockholders receive dividends before dividends on ordinary stocks are announced. If the company is wound up, preference stockholders rank above ordinary stockholders in the distribution of assets. Preference stocks can often have a fixed dividend rate.
Bonus Issue : This is a free issue of stocks to the stockholders based on the number of stocks already owned.
Rights Issue : A rights issue can be granted to stockholders to buy stocks in the company, often below market price.
Derivatives : There are also securities you can trade on the market that derive their price from the parent stocks.
There are two types – Options and Warrants – and these are collectively known as Derivatives.
There are two parties involved in an options contract, the writer or seller and the taker or buyer. The writer writes the option and has the obligation of accepting or delivering the stocks. The takers have the right, but not the obligation, to buy or sell the stocks.
There are many advantages of options trading, the least of which is leverage. An option can be bought and sold for a fraction of the stock price, giving an effective higher return (or loss) on investment for a stock price move.
Warrants : Warrants, like options, derive their price from the parent security. Warrants though are issued by banks and other financial institutions and are classified based on whether they have an investment or trading purpose.
Warrants may be issued over securities, a portfolio of securities, a stock price index, currency or commodities.
1. Types of warrants
A warrant is an option offered in the form of a security. There are two basic types of warrants. Warrants have a fixed tenure (maturity) and, if not exercised, are worthless after their expiry date.
A call warrant gives the holder the right to buy a given quantity of the underlying asset at a predetermined price (i.e. exercise or strike price) on or before a particular date (i.e. expiry date).
A put warrant gives the holder the right to sell a given quantity of the underlying asset at a perdetermined price (i.e. exercise or strike price), on or before a particular date (i.e. expiry date).
2. What are covered warrants?
Covered warrants (or structured warrants) are issued by a company (usually a bank or securities firm) on shares of another listed company, basket of shares or an index.
In Malaysia, only covered call warrants (or “Call Warrants” under the SC’s Guidelines for the issue of Call Warrants) in the form of “fully-collateralised” or “non-collateralised” Call Warrants are currently permitted to be issued by authorised banks or universal brokers approved by the SC. Put Warrants are not yet permitted under the Guidelines.
3. What are the major differences between Call Warrants and Company Warrants?
Company Warrants Call Warrants
Issuer Same listed company with that of the underlying shares Authorised bank or universal broker
Underlying asset Shares issued by the listed company Shares issued by another company, basket of shares or an index
On exercise New shares of the company are issued. Results in dilution of shares Involved existing, already-issued shares. No dilution effect on shares
Expiry date Longer tenure; usually more than 4 years Shorter tenure; usually less than 4 years
Settlement method Physical delivery of shares Either physical delivery of shares or cash settlement
4. “Fully-collateralised” versus “non-collateralised” Call Warrants
A Call Warrant issue is “fully-collateralised” if the issuer deposits the relevant amount of underlying securities with an independent trustee in order to secure the obligations of the issuer and adequately protect the interests of the warrant holders.
A Call Warrant issue is “non-collateralised” if the issuer provides for its obligations in a form other than by way of charge over the underlying securities. The issuer usually adopts dynamic hedging startegies to provide for its obligations under the warrants.