What are Stock Warrants? How do they Work?

Stock Warrants from Kinder Morgan

Sample Stock Warrant

Often you might come across stock warrants and you might have wondered what does it mean. Even if you are not interested in buying the warrants, it is important to know if the company that you are interested in buying the stock in also has outstanding warrants, as the warrants can have disproportionate effect on the returns you may be able to realize from the stock itself. To understand why this is the case, it is critical to understand what is a stock warrant and how it works. There are similarities between warrants and options but they also differ in some key respects

Difference between Stock Warrants and Options

If you have stock options awarded to you through your employer, you have the basic idea of how these options work. If you invest in publicly traded options then you have even better idea of how the options work. Warrants are similar to the options, but with one critical difference.

Just like an option, a stock warrant is issued with a “strike price” and an expiration date. The strike price is the price at which the warrant becomes exercisable or “in the money”. Both the warrants and the options eventually expire, if they are not exercised by a certain date.

The Key Difference Between Warrants and Options

Publicly traded options are created by the exchanges and are backed by the stock that already trades in the secondary market (the stock that is already issued that most of us buy and sell – as opposed to the primary market stock issue such as an IPO). When a Call Option is exercised, for example, the required amount of stock from the secondary market is purchased at the strike price.

Stock warrants on the other hand are issued directly by the company and they may trade on the exchanges or over the counter. When a warrant is exercised, the stock that is purchased upon exercising the warrants needs to be issued new by the company. These are not the shares that trade on the secondary market.

So you can see, exercising an option has no effect on the total number of common stock shares outstanding, whereas exercising a warrant increases the total number of common stock shares outstanding.

Stock warrants can also be long term, expiring far in the future while the options are typically short term instruments, expiring within the year (LEAPS are long term options but they are typically only available for a few selected stocks).

If you own common stock in a company that also has warrants outstanding, any exercise of the warrants will increase the number of outstanding shares thereby diluting the existing shareholders. This dilution is more pronounced when warrants are exercised, compared to say, the company issuing new shares on a follow on offering since any follow on offering is typically done close to the market price of the shares, while the exercise of the warrants are typically done below the market price of the shares.

Example of a Warrant

Consider a hypothetical warrant with a strike price of $25 and an expiration date of June 1, 2020. Let’s say the shares of the company currently trade at $5/share. We will take 3 dates with hypothetical stock prices and review how the warrants will behave on those dates and prices.

Situation 1: Today, Stock Price = $5/share

Since the stock price today is $5 and the warrants have a strike price of $25, exercising the warrants today does not make sense. It will force the warrant holder to purchase new stock at $25/share while the stock can just be bought in the secondary market at $5/share. Therefore, the warrants will not be exercised. The warrants will also have very little value because they are so far “out of money”.

The warrants will still have some value. This value comes from the fact that the warrant does not expire for another 8 years and it is likely that the stock price might exceed $25/share at some point during the next 8 years. Just like options, the value of the warrants can be calculated by using the Black Scholes method. Let’s assume, for the sake of the example, that the value of the warrants is $0.25

Situation 2: June 1 2016, Stock Price = $30/share

If the stock price has risen to $30/share by June 1, 2016 the value of the warrants is at least $5. This is because the warrant holders are now able to exercise the warrants, buy the stock at $25 and sell it back in the market at $30 for a $5 profit. Knowing this the market moves to bid up the price of the warrant until the possibility of profiting by just buying the warrant and exercising it right away disappears.

Note that if an investor buys the warrant on June 1 2016, and immediately flips it by exercising it and selling the resulting stock, he will not make any profit. In fact, he may end up with a loss since the price of the warrant is likely to be more than $5 (there are 4 more years remaining before the warrants expire and the probability that the stock price might move higher than $30 in that time gives the warrant additional value).

However, if the investor bought the warrants 4 years ago and paid very little for it, this is a great time to sell the warrants or exercise them. In this scenario, the investor in the warrants may end up with a profit of $5 – $0.25 = $4.75 or 1900%. The stock only went up by $30 – $5 = $25 or 500%.

Situation 3: June 1 2020, Stock Price = $25 or less

The warrants will expire worthless since there is no possibility of profiting by exercising the warrants. Note that the stock may have fallen only 17% since June 1, 2016 but the value of the warrants have declined by 100%.

As this example shows, the Warrants are highly leveraged and magnify the gains or losses on the stock. Therefore they should be used with care and unless you are a professional options trader and are comfortable with the risk, you should keep your exposure to the warrants to a small part of your portfolio.

That being said, warrants do have a role to play in an investor’s portfolio. They can be a way of controlling larger amount of stock with using a less capital than if you buy the stock directly. They can also be used for hedging purposes, similar to options.

And sometimes, the stock may not be undervalued but the stock warrants may be since warrants are not as popular with investors as the common stock. In those situations, it may offer the possibility of a risk free arbitrage.

Here is a real life example of a stock warrant that we bought and sold over the course of 1 year. These warrants were originally issued by Real Opportunity Investments Corp as an incentive for the investors to purchase their stock. The warrants have now expired.


  1. Brent says

    So I was issued x number of warrants of a gold mine as a buy out offer. The current price of the stock is $15 and change, however the warrant is exercise date is May 2017 at $29 and change. I believe the stock will never get to that price level, so basically the company didn’t give me anything as I am sure the warrants will just expire at the due date…. correct ?

    • says

      Brent, the warrants will still have value since the expiry date is in the future and there is some probability (however small) that the stock might get up to $29 and above before the expiry date. The value though will be very little today if the stock price is so much under the exercise price. If the stock price does not reach $29, then the warrants will expire on the due date and if you hold it until then than your value will be zero.

      Depending on what the warrant value is (you can try and find the ticker for the warrant to find out what they are trading at) and how many you have, it may not even be worthwhile to sell them as commissions might eat up a big part of your proceeds. So in that sense, it may be advisable to just hold on on the off chance that the stock might appreciate enough to make this worthwhile. There is still about 4 years left, so why not!

  2. Amaigus says

    Great, intelligently written article. I knew they were like options in some way, so you explained it perfectly by making a direct comparison.

    What is strange is the motivation for issuing them. Seems like a weak way to raise money. Take in a small premium in exchange for lots of dilution later. At least Employee stock options motivate the employee, making the giveaway more worthwhile. On the other hand, the company raises cash early from the process of diluting at higher prices, and implicitly doing a buy back at lower prices (at expiration). But why not do that with the real thing, dealing with real money.

    It doesn’t make me want to hold stock (or warrants) in a company that issues warrants. What is the management saying about their optimism?

    • says

      Thank you! Warrants do reflect the weak position company is in when they are raising money. Most of the time, they are thrown in as a sweetener to make a deal (private stock offering or a bond issue or just simple loans) go through and are almost always privately negotiated. Regular options are traded on public options exchanges whereas warrants can be very illiquid over the counter and may not be standardized. For example, when Buffett came to the aid of Goldman Sachs a few years ago, warrants were the carrot that made the deal go through.

      Dilution is a valid concern for the stock if there are warrants outstanding. Warrants themselves may actually make sense as an investment depending on the current stock price, business fundamentals and expiration date. Some of these warrants may have been issued so long ago that the business fundamentals may have materially changed by now so do take that into account.

  3. Dennis Brower says

    I am being offered stock and warrants as settlement in a bankruptcy case. I am told I have to pay US tax on the stock and the warrant before the stock can be sent to me. Why pay income tax on something that may be worth $0?

    • says


      You should be able to take a capital loss later when the warrant (and possibly stock) turn out to be worthless. Taxation is outside my expertise but be sure to keep the paperwork to help you figure out the cost basis (the current worth of the stock and the warrants, probably through an appraisal if this is being done under a legal process). Also, if the stock and the warrants are being offered to you in lieu of your original ownership stake in an asset, you might be able to take a capital loss right away if the value of what is being offered to you is less than your initial investment. A competent tax advisor should know the exact rules.


    • says


      Warrants listed on NYSE can be found at


      for Nasdaq and OTC, you will have to print out (download) a list of all stocks or issues trading on those exchanges and then manually filter for warrants. Typically warrant symbols end in W or WS

      Some sites have tried to compile a database of currently active stock warrants. These include stockwarrants.com and commonstockwarrants.com. However, I cannot vouch for their services and accuracy.

      Also, I have not read Wall Street Journal recently (I know, blasphemy!) but I think they do have a listing of commonly traded stock warrants in there.


  4. says


    As a startup issuing warrants to a founder as part of an acquisition, my client wants to issue said warrants without an expiration date. Can that be done, legally? Thanks.

    • says


      Perpetual warrants are possible and there are no legal restrictions around these. They are not very common though but I see no reason why they cannot be issued. Even if they do not have an expiration date, they may de-facto expire when the rest of the terms of the warrants are met.


  5. Maxwell says

    Thank you for the breakdown. However, I am still a little confused about the process. Here is the scenario I am in…

    On October 18, 2013, I purchased 3,973 warrants at a price of $1.18 ea. With an exercise price of $5.00 a share and an expiration of June 2018.

    As of Nov 1, 2013, the stock itself is at $3.69 and the warrant price is $1.38

    Lets say on Nov 15, 2013, the stock went to $14 a share and I decided to exercise the warrant. Here is where I am confused, when I exercise the warrant do I have to pay additional $5 for each share even though I purchased the warrant at $1.18?

    Any help is appreciated. Thank you in advance!

    • says


      Yes. The warrant gives you the right to purchase the stock at $5/share. You bought this right when you paid $1.18/warrant. If the stock goes to $14 and you exercise the warrant, you will pay $5/share for each warrant exercised. Presumably, you will turn back and sell the stock at $14 and keep the difference ($7.82/share) as your profit.

      Alternatively, at the stock price of $14, the warrant itself would be valued quite a bit, closer to $9/warrant. You could just sell the warrant back into the market without going through the exercise process.

    • says

      Jen, the offering document for the warrants will have the detail. Should be a document filed with the SEC. Alternatively, most companies do mention these details in their annual reports for the outstanding warrants so that is a quick way to check.

      • jen dahl says

        Thank-You!!!! I bought ICLDW today at 2.17. It closed at $4.64. The exercise price (I think is $5). ICLD is currently at 10.10 after hours. I’m usually hold stocks for a long time. Today is the first time I have ever purchased a warrant issue.

  6. Allan Tan says

    Gaming company Leisure & Resorts World Corp. expects to raise P437.5 million in fresh funds from the issuance of preferred shares and warrants.Leisure & Resorts, based on the registration statement approved by the Securities and Exchange Commission, will issue 250 million preferred shares for P1 apiece and 12.5 million warrants at P15 per share.The buyers of preferred shares will be entitled to a dividend rate of 8.5 percent per annum.Meanwhile, the warrants will be issued to buyers of preferred shares on the fifth year from the issuance of the preferred shares.Under the plan, an investor buying 20 preferred shares will be entitled to purchase 1 warrant share at P15 apiece.  The offering period for the preferred shares will start from March 13 to 21, while the listing date is set on March 31.

    Ir, kindly explain this to me… the current price of the warrant is 0.90/share. Is it advisable to by warrant at this price?
    Thank you

    • says

      Allan, I assume the warrants are convertible to common shares even if they are being issued along with the preferred. What is the current price of the common shares and do you expect the common shares to do well in the next 5 years based on the business prospects?

      Finally, I may be misunderstanding this, but are you saying that the warrants have already been issued (since they are trading at 0.90/share) but the preferred shares will be offered in March?

      I generally do not like to buy the warrants when they are issued as it indicates a negotiating weakness on the company’s part. In a year or two, the business might be much stronger making the warrants compelling.

  7. Lorne says

    This was somewhat helpful learned lots,but a private company being taken over by another private individual in order for the sale to go threw do you have to exercise your warrents to complete the transaction,thankyou

    • says

      Hi Lorne,

      If the take over is being done as an asset purchase, then most likely the existing warrants will be nullified. Essentially, the current business is being closed and the assets are being sold. If it is done based on the equity method, it is quite possible to negotiate the treatment of the warrants and have them carry forward. Please consult a M&A attorney for better detail and things might be a little different in Canada from US.

      Should add that if the warrants are in the money (i.e, the stock/company value is worth more than the strike – not sure how this is determined in the private market) and if you are a holder of the warrant, you are better off exercising them and taking the equity in the business prior to the sale.


  8. Anmum says

    Thanks a lot for the insight! Shailesh… Now I’m quite clear about the warrants. May I ask about premium and gearing, which I found in announcements? What are those? Are those showing significant information.

    Best regards,

  9. james morgan says

    what happen to warrants if company is bought out at a high pps do you get the stike price of the warrant or closer to the pps

    • says

      Hi James,

      Please refer to my answer to Lorne above. You are talking about a public company so the purchase method is equity. In this case, how the warrants are treated are based on the methods laid out in the offering document. If the offering document is silent on this, than it may be subject to the negotiated treatment between the acquirer and the acquired companies.

      But lets say the acquisition is not closed yet. In this case, you should be able to get the value of the warrant that is derived from the pps (assuming as you state the the pps is high and above the strike). The reason is that if you do not, you should go ahead and exercise the warrant, forcing the company to issue new stock, and then sell the stock in the market to make up the difference.

  10. Su says

    Hi Shailesh Kumar,

    So, basically a warrant can be bought and sole in the market just like a share without mandatorily be exercised? The only difference is that the warrant allow the holder to own the underlying share at the pre-defined exercising price? but the profit generated still the same whether exercise warrant or not?

    • says

      Generally yes. Like any instrument, the actual price you get depends on how liquid the market for that warrant is. The commissions for selling versus exercising might also be different depending on your broker (selling is generally cheaper). Other than these transaction costs, there is no difference in whether you sell it or exercise it.

  11. Tejas Mehta says

    Can the warrants be sold without being exercised (meaining traded for a stock at strike price)? If I have warrants which I purchased at $2 couple of years ago with a strike price of $40, and today, the warrants are trading at $4 and the strike price of $40 has hit, can I just sell the warrants (as if I were to sell any common stock in the market) and make the profit of $2 per warrant? OR is it mandatory for the warrants to be exercised and traded with a stock?

    Also, can warrants be sold if the strike price does NOT hit? Let’s say the warrants are $3 and the strike price hasn’t hit, but warrants are about to expire in few months. Can I just sell the warrants for $3 per piece and still make some money although the strike price of $40 hasn’t hit?

    • says

      Hi Tejas,

      Warrants can always be sold regardless of whether the strike price is hit or not. The price you receive will of course vary based on the stock price vs strike price. If you hold the warrants in a brokerage account, the process is just like selling a stock. If you do not hold it at a broker, i.e you have physical warrants, check with your broker for the process to transfer them to your account with the broker.


  12. Faisal says

    hi, Shailesh

    I had purchased X no of shares on Sep 07, 2014 via private placement @$1.65 per unit which consist of 1 share & 1/2 warrants. I received the X no of warrants with an expiration date of Sep 07, 2015 & excercise price of $2.20 per unit.

    Now I would like to know if I dont want to excercise the warrants what would I loose in this scenario.

    Thank you

    • says

      Faisal, if you do not exercise the warrants, the warrants will expire and you will lose whatever the value is for the warrants on Sep 7, 2015. The value depends on the share price and if it is below $2.20/share, the value of the warrants will be small and will become smaller as the date approaches. If the share price is above $2.20/share, the value of the warrants will be roughly the difference between the stock price and $2.20.

      Generally, if the chances of the warrants to be in the money (i.e share price above the exercise price) are small, it might be worthwhile to sell the warrants in the open market.

  13. Pieter Smit says

    Hi Shailesh

    I urgently require some advice from a professional. I recently bought shares a brokage firm. We acquired the shares on (what I understand) was the 2nd market at the price of $17.50. The IPO price was $92.70 and currently trades at aprox $88. We instructed our broker last week to sell half our shares which seemed to be a good deal at that time, only to be notified the next day that the selling of the shares was rejected due to a warrant that was attached to our shares.
    This came to us as a huge shock since we were never at any stage informed about the warrants attached.
    My question is this, should they not have informed us before buying the stock that there was warrants attached or could they also not have known about the warrants??
    Please can you advise on this matter?
    Hope to hear from you soon

      • says

        Hi Pieter,

        I do not know of a case where shares are not sellable due to a warrant attached to it. It is possible, just not something I have seen before your situation. In this case, you mention that the warrant price is $50. I am assuming this is not the “strike price” but the actual price that you would receive if you were to sell the warrants.

        Have you checked with your broker and the possibility of selling the shares and the associated warrants together?

        If the broker is unable to sell the warrants (sometimes the market for the warrants is too illiquid), you may have to request him to first exercise the warrants you own, and then once this is complete you can than sell the shares (along with the new shares you receive with the warrants exercise). Exercising the warrants will require you to purchase new shares in exchange for the warrants at the specified “strike price”. The cost of exercising the warrants will be the “strike price” plus transaction costs. This will add time to the process but may be necessary to complete the sale.

        In either case, please confirm the prices you will receive before issuing firm instructions to ensure that the entire transaction (warrants + shares) is profitable for you. Please let me know if you need additional help once the cost/price picture is clearer and you know what the broker is able to do.


  14. Vidar says

    I have warrants that will soon expire. The warrants have a positive value, letting me buy the stock at about 20% discount.

    What will happen on the exersice date, if I do nothing? (Do not trade the warrants) will they become worhtless, or will I get automaticly paid?

    • says

      Hi Vidar,

      If you choose to not exercise your warrants, you forfeit your rights when they expire. There is no one on the other end to pay you unless you make a trade (or exercise).


  15. Daniel says

    Hi there. I am in the current situation: (stock) today announced a non-brokered private placement equity financing of up to 100,000,000 Common Shares in the capital of the Company at a price of $0.02 per Common Share for gross proceeds of up to $2,000,000 (the “Offering”). Each Common Share subscribed for will be entitled to a one-half (1/2) Share Purchase Warrant at a price of $0.05 per share for a period of 2 years.

    The share price is currently $0.025 per share. Do you think something like this would be a good idea?


    • says

      Daniel, it would depend on whether the stock is likely to reach anywhere close to $0.05/share price in the next 2 years. While the warrants have some value, they are derived from the stock price. If you think the company is likely to use the proceeds from the offering to generate a positive return, than this may be attractive. If the company is doing this for other reasons such as servicing debt they cannot afford, than most likely not.


  16. Peggy Lin says

    Hi Shailesh,

    I am a bit confused on my stock situation and appreciate if you can explain it to me?

    Purchased 6,000 shares of ABC common stock at $ 5.75 per share and stock ABC represented units of common stock ABB. They are going through a mandatory separation wherein I will receive common stock and warrants. The expiration date on the warrant is Dec 2017 but no indication on the warrant price. So my questions are:

    1) As usual practice, will the warrant price lower than my purchase price $ 5.75? How they determine the price of warrant?
    2) If my warrant price is $4.75 and the current price is $ 6, will I still get a gain of $ .25 per share or $ 1.25 per share? How does it calculate?

    Your advice is a great help to me!
    Many thanks,

    • says

      Hi Peggy,

      Let me see if I understand the situation. Essentially, the stock ABC, that you purchased for $5.75/share and is currently at $6/share, will be replaced by a combination of new stock + warrants attached to the new stock after the spinoff. And when you say warrant price, you are referring to the warrant strike price?

      1. The warrant strike price will usually be higher than the current stock price ($6). The reason being that warrants are issued as a payoff if the company is able to raise the stock price with its performance in the future. At the same time, the price of the new stock that you will receive should be less than $6 if this is a 1 to 1 share deal (1 new share issued for 1 old share of ABC stock)

      2. If the warrant strike price is $4.75 and the current stock price is $6 (this will refer to the stock price of the new stock that you are getting in the spinoff, not the old ABC stock), if you exercise your warrant or sell it in the market, you should get approximately $1.25/warrant. However, this is NOT your gain, as you still have 1 share of new stock that you need to consider. If you sell the 1 share of new stock at $6, you will in total get $7.25 ($6 for share and $1.25 for the warrant). Since your cost basis is $5.75, your gain is $1.5.

      However, remember I said “approximately” for the warrant price. This is because there is still time left for expiration, and the warrant price will be higher that $1.25/warrant if the market thinks the stock price can rise above $6 before the warrant expires. So if we changed the example and take the case where the warrant strike price is $6, and the current stock price is also $6, the warrant will still be worth more than $0 if there is still time left before the expiry during which the stock price can go higher than $6.

      Let me know if I misunderstood something and I will revise my answer.


  17. Bob says

    I do not fully understand these stock warrants. I have 4000 shares in NAK Northern Dynasty Mineral. I just read yesterday that that as of March 4, 2015,…looking at the following article, what happens to my 4000 shsres. I purchased them at .56 cents per shsre. Thank you

    Northern Dynasty Completes Prospectus to Clear Special Warrants
    Published: Feb 25, 2015 5:00 p.m. ET


    VANCOUVER, Feb. 25, 2015 /PRNewswire/ – Northern Dynasty Minerals Ltd. (NDM)(nyse mkt:NAK) (“Northern Dynasty” or the “Company”) reports that further to the Company’s news releases of January 13, 2015 announcing the sale of 35,962,735 special warrants to raise of $15,499,939, the Company has now filed and received a receipt from certain Canadian securities regulators for the final short form prospectus qualifying the distribution of the 35,962,735 common shares (the “Common Shares”) of the Company issuable upon exercise of the special warrants. A copy of prospectus can be downloaded from http://www.sedar.com. Accordingly, these Common Shares when issued in accordance with the terms and conditions of the special warrant certificates will not be subject to resale restrictions in Canada. All special warrants, except those held by US holders and one principal shareholder will be automatically exercised at 4:00 p.m. on March 4, 2015 and such holders will automatically receive the underlying Common Shares without any further action on their part. The balance of the special warrants can be exercised over a period of up to 24 months from their issuance.

    The issuance of the Common Shares by the Company has not been registered under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”) and such Common Shares will be issued pursuant to available exemptions from registration. The Company has filed a registration statement under the U.S. Securities Act to register the resale of Common Shares to be issued to certain U.S. holders of the special warrants. The registration statement was declared effected by the United States Securities and Exchange Commission on February 24, 2015. A copy of the registration statement can be downloaded from http://www.sec.gov.

    • says

      Hi Bob,

      If you only own the shares and not the warrants, there will be no change for you. You will continue to hold 4000 shares. However, since 36 million new shares are being issued and they will come into circulation on the market, that might pressure the stock price downwards.


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