Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What advantage do warrants provide to an investor?

1. The ability to borrow against stocks

2. The option to buy stock at a predetermined price

3. The right to sell securities at market rates

4. The guarantee of dividend payments

The correct answer is: The option to buy stock at a predetermined price

Warrants are financial instruments that give investors the option to purchase a company's stock at a predetermined price, known as the exercise price or strike price, before a specific expiration date. This feature allows investors to benefit from potential stock price appreciation. If the market price of the stock rises above the exercise price, the investor can exercise the warrant to purchase shares at the lower price, thereby potentially realizing significant gains. This leverage can lead to high returns, making warrants an attractive opportunity for investors seeking to capitalize on future stock performance. The predetermined nature of the exercise price is advantageous because it allows investors to lock in a price in advance, which can be beneficial in volatile markets where stock prices fluctuate significantly.