What Are Stock Warrants?

Definition & Example of Stock Warrants

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A stock warrant is the right to purchase newly issued shares of a stock at a certain price for a certain period of time. The stock is issued directly by the company.

What Is a Stock Warrant?

While a stock warrant gives the holder the right to purchase, the owner does not yet own any stock. You're not locked in when you buy a warrant and are always free to decide you don't want to buy the underlying security.

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 period of time.

Longer-term stock warrants are typically good for up to 15 years, while stock options are shorter-term and can expire in weeks or just two or three years.

How Stock Warrants Work

Warrants are good for a fixed period of time and are worthless once they expire. The most frequent way warrants are used is in conjunction with a bond. A company issues a bond and attaches a warrant to the bond to make it more attractive to investors. If the issuing company'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. The stock is coming directly from the company. It's not being purchased from another investor.

If a warrant has an agreed-upon strike price of $20 per share and the market price of the stock rises to $25 per share, the investor can redeem the warrant certificate and buy the shares for $20 per share, netting an immediate $5 per share gain.

If the stock never rises above the strike price, the warrant expires, so it becomes worthless. Warrants are more popular outside the United States, particularly in China.

Warrants come with no voting rights and pay no dividends. U.S. stock warrants allow for purchase up until the expiration date, but this is not necessarily the case for overseas warrants.

Types of Stock Warrants

A "put" warrant sets a certain amount of equity that can be sold back to the company at a given price. A "call" warrant guarantees your right to purchase a set number of shares at a certain price. Both have a certain date of expiration.

Different types of warrants have different degrees of risk and value:

Traditional Warrants

These are the warrants sold in conjunction with a bond, which allows for a lower coupon rate on the bond. They can often be detached and sold on the secondary market.

Naked Warrants

These warrants also allow the holder to exchange the certificate for a securities purchase but are not tied to a bond or preferred stock.

Wedded Warrants

These warrants must remain attached to the bond, meaning if the holder wants to execute the warrant to get shares, the bond must also be surrendered.

Covered Warrants

Covered warrants are issued by financial institutions and not individual companies.

Key Takeaways

  • Stock warrants are issued directly by a company or financial institution, and can last for up to 15 years.
  • Typically they're attached to a bond offering to make the bond more appealing.
  • Stock warrants are more popular in China than in the United States.