3 Types Of Explosive-Growth Companies -- And Why They're Dangerous
1. The Money-Raisers
Growth-oriented companies and Wall Street bankers are often locked in an unsavory dance. The bankers the promise of fresh cash to help these companies rapidly expand -- but with a catch that most investors overlook. Not only must these companies fresh stock to the bankers' clients in exchange for the , which results in a dilution in the stake of existing shareholders, but these bankers also help themselves to another pair of perks that can dilute investors -- options and warrants.
Stock options are often granted to the underwriters of any stock , which can be converted into yet more shares if the stock price rises in the near-term (typically within a year). And warrants are also issued for the right to buy shares at a fixed price, which is often lower than the current market price. These warrants can stay out of view for several years until the underwriter suddenly re-emerges to claim his bounty.
(More on this: Options and warrants, which are basically contracts, operate in a similar manner, but are fundamentally different. While the company has the right to issue options, which can be had for free, the banker has the right to issue warrants, which have a price attached to them.)