Rights and Warrants – Series 7 Exam

🧾 Rights and Warrants – Series 7 Exam Quick Guide
📘 Understanding Shareholder Rights and Warrants for Test Success

Rights and warrants are important equity-related instruments that show up frequently on the Series 7 exam. Both relate to opportunities for investors to purchase stock, but they function differently. Here’s a simple and clear breakdown to help you master this topic quickly.

🎯 1. What Are Rights? (Preemptive Rights)

Definition:
Rights (often called subscription rights) give existing shareholders the right to purchase additional shares of a company’s stock at a discounted price, typically before new shares are offered to the public.

Purpose:

• Protects shareholders from dilution (loss of ownership percentage) when a company issues more stock.
• Allows existing shareholders to maintain their proportional ownership.

Key Characteristics:

• Short-term instruments (typically 30–60 days).
• Exercise price is below the current market price.
• Can be traded on the secondary market (rights offering market).
• If the shareholder chooses not to exercise them, they can sell the rights.

Mnemonic to Remember:
💡 “Rights are Right Now” – They expire quickly!

🎯 2. What Are Warrants?

Definition:
Warrants give the holder the right to purchase stock at a specific price (exercise price), but for a longer period—often years, sometimes even perpetual.

Purpose:

• Often issued as a sweetener with bond or preferred stock offerings to make the deal more attractive.
• Encourages investment by providing the opportunity for future stock ownership at a fixed price.

Key Characteristics:

• Long-term instruments (years or even indefinite).
• Exercise price is usually higher than the current market price at issuance.
• Warrants can sometimes be detached and traded separately from the bond or preferred stock.
• Exercise can be profitable later if the stock price rises above the warrant’s exercise price.

Mnemonic to Remember:
💡 “Warrants Wait” – They last much longer than rights.

📊 Comparison Chart

🎯 3. Series 7 Exam Tip

On the exam, remember:

• Rights protect existing shareholders.
• Warrants reward new investors in bonds or preferred stocks.
• When in doubt, short-term = rights, long-term = warrants.

Also, expect questions about:

• What happens if rights aren’t exercised? (They expire worthless unless sold.)
• Warrants and dilution: Warrants can dilute shares if exercised later.

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