What Are Stock Warrants?

Holder Has Right to Buy Stock Shares at Fixed Price

Stocks warrants may sound like a legal process for arresting someone (your stock broker?) or some thing (a company?), however they are not nearly so exciting.

A stock warrant in its most basic form is simply the right to purchase shares of a stock at a certain price. Warrants are good for a fixed period and once they expire, are worthless.

In many ways, a stock warrant is like a stock option, which also gives the holder the right to buy shares at a fixed price during a defined time period.

One of the main differences is that warrants are often good for a number of years (up to 15). Options normally expire in under a year, although some can extend for two or three years.

Another difference between options and warrants is how they originate. Warrants are normally only issued by the company whose stock is subject to the warrant. The most frequent way warrants are used is in conjunction with a bond.

A company will issue a bond and attach a warrant to the bond to make it more attractive to investors. If they issuer's stock increases in price above the warrant's stated price, the investor can redeem the warrant and buy the shares at the lower price.

For example, if the warrant has a strike price of $20 per share and the market price of the stock rises to $25 per share, the investor can redeem the warrant and buy the shares for $20 per share.

If the stock never rises above the strike price, warrants expire worthless.

There are complicated formulas for determining the value of warrants based on the strike price, the current market price, time until expiration and other factors.

This describes how a simple warrant works, however there are a number of different types of warrants with varying degrees of risk and value.

Be sure you completely understand the terms and conditions of any warrant before becoming involved in these securities.