Ping An Securities Derivatives Department
The so-called equity warrant refers to the warrant issued by a listed company with its own shares as the underlying securities; Covered warrants are warrants issued by a third person (usually investment banks, securities firms and other financial institutions) other than the issuer of the underlying securities. From the definition, the main difference between equity warrants and covered warrants is that the issuer is different: the issuer of equity warrants is a listed company, while the issuer of covered warrants is a third-party institution. In addition, there are the following differences between equity warrants and covered warrants:
First, the scope of the underlying assets is different. The equity warrant gives the warrant holder the right to purchase the shares of the listed company at the agreed time and price. Therefore, the underlying assets of the equity warrant are limited to the shares of the listed company; The underlying assets of covered warrants can be individual stocks, a basket of stocks, stock index, etc. Obviously, covered warrants are much more flexible than equity warrants in the setting of underlying assets.
Secondly, the issuing purpose of warrants is different, and the right exercise direction of holders is also different. Equity warrants are usually used by listed companies as financing or equity incentive tools. For example, separate trading of convertible bonds, the distribution of subscription certificates can attract investors, and also have the purpose of secondary financing; Covered warrants are issued by financial institutions such as securities companies to provide investors with leverage investment and risk management tools. A covered warrant may be a call warrant or a put warrant. If investors are optimistic about a stock but do not have sufficient funds, they can buy the subscription certificate of the stock to expand the market and enjoy the gains brought by the rise of the positive stock. In addition, investors can also use covered warrants for risk management.
Third, the circulation of equity warrants is generally fixed, while the circulation of covered warrants can be changed under certain conditions. After the issuance of equity warrants, the circulation is generally fixed. Under certain circumstances, the covered warrant issuer can issue additional covered warrants, so its flow is usually not fixed. For example, in the Hong Kong market, the Exchange stipulates that when the market volume of covered warrants exceeds 50% of the warrant issuance, the issuer can apply for additional warrants, thus increasing the circulation of warrants to meet market demand.
Finally, there are differences between the settlement method and the exercise result. The exercise of equity warrant holders is settled by shares. The listed company meets the exercise requirements of investors by issuing new shares, and the exercise will lead to an increase in the company's total capital stock; The settlement method of covered warrants is more flexible, which can be both stock settlement and cash settlement. In case of cash settlement, the warrant holder shall collect cash at the difference between the exercise price and the settlement price of the underlying assets, which does not involve changes in the share capital of the listed company. In the case of stock settlement, taking the subscription certificate as an example, the issuer meets the exercise requirements of investors by buying (or holding) the underlying stock in the market. In this way, the stock is only transferred from the covered warrant issuer to the warrant holder, so it will not involve changes in the share capital of listed companies.
