Certified Anti-Money Laundering Specialist Certification (CAMS) Practice Exam

What do stock warrants provide to their holders?

1. The right to sell shares at a specified price

2. The right to subscribe for ordinary shares at a fixed price

3. The ability to trade shares on the open market

4. A guaranteed return on investment

The correct answer is: The right to subscribe for ordinary shares at a fixed price

Stock warrants provide holders with the right to subscribe for ordinary shares at a fixed price. This means that a warrant gives the holder the option to purchase a specified number of shares at a predetermined price, which is known as the exercise price or strike price, usually over a certain time frame. If the market price of the underlying shares rises above the exercise price, the holder can exercise the warrant to buy shares at the lower fixed price, potentially realizing a profit. This mechanism is designed to incentivize investors, as it allows them to benefit from the appreciation of the company’s stock while providing companies with access to capital if the warrants are exercised. The other options do not accurately describe the nature of stock warrants; they either refer to different financial instruments or do not capture the essence of what warrants entail. For instance, the ability to sell shares pertains to options, and a guaranteed return on investment does not apply to warrants since they can incur a risk of loss if the shares do not appreciate in value.