Rights, warrants and order types
◈ 9 cardsThe value of a right cum- and ex-rights; a right against a warrant against a call option on issuer, term and purpose; and the TSX order book — market, limit, on-stop, day and GTC — with board lots by price band.
Rights — the pre-emptive right made tradeable
When Tamarack Foods raises equity from its own holders it issues rights: one per share held, each a short-lived (typically a few weeks) entitlement to buy a new share at a subscription price below the market. Tamarack trades at $30.00 and offers one new share at $24.00 for every 5 rights. What is one right worth?
Cum-rights — the share still carries the right. A buyer of 5 shares gets 5 rights, adds $24 and receives a 6th share; the 6 shares are worth what the market will pay once the new shares exist:
=(30-24)/(5+1). The ex-rights price — the share after the right has been detached — is =30-1.00 = $29.00.
Ex-rights — the right now trades separately. Five rights plus $24 buy a share worth 29: $(29 - 24)/5$ = 1.00. The two formulas agree, as they must; the $n+1$ in the cum formula is the same share counted before the split of value. A holder who neither exercises nor sells the rights simply gives away the $1.00.
Right, warrant, call — three ways to buy later
One definition before the table, since Module 12 is where the call is taught: a call option is a traded right to buy a share at a fixed strike price until an expiry date, sold (written) by another investor for a premium — the company is not a party.
| Right | Warrant | Call option | |
|---|---|---|---|
| Issued by | the company, to existing holders | the company, as a sweetener attached to a new debenture or preferred | written by an investor; cleared by CDCC |
| Term | weeks | years | months (standard cycles) |
| Purpose | raise equity without dilution | make the debt issue saleable at a lower coupon | speculate or hedge |
| Trades | on the exchange, briefly | on the exchange, separately from the debt | on the Montréal Exchange, 100 shares a contract |
A warrant on Cobalt Ridge Mining's new debenture lets its holder buy Cobalt Ridge shares at a fixed price for five years; when exercised, the company issues new shares and receives the money. A call on the MX is a contract between two investors; the company is not a party (Module 12).
Telling the dealer how — order types
- Market order — fills now at the best available price; execution certain, price not.
- Limit order — fills only at your price or better; price guaranteed, execution not.
- On-stop order (TSX) — held out of the book until the trigger price trades, then enters as a limit order at the limit you set. Used as a stop-loss below a long position, or a stop-buy above a short (Lesson 11.8). Some dealers offer a stop-market variant that enters as a market order on trigger — then there is no price floor.
- Duration — a day order expires at the close (5 p.m. on the TSX); GTD to a date you set; GTC (good-till-cancelled) stays until filled or cancelled, subject to the dealer's maximum life.
- Board lot — the standard trading unit, set by the previous close: 100 shares at $1.00 and over; 500 from $0.10 to under 0.10. An odd lot (fewer) trades through the odd-lot facility, often at a slightly worse price.
"All-or-none" is a handling instruction some dealers accept, not a TSX order type; do not list it among the exchange's orders.
Recompute
A 4-for-1 offer at the same prices: cum =(30-24)/(4+1) = 1.20; ex-rights price 28.80; ex =(28.80-24)/4 = 1.20. Cold — the order for four situations: buy now whatever the price → market; buy only at 27 or less → limit; protect a long if it falls through 26 → stop-loss (on-stop); keep the order live for a month → GTC.