In finance, a warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date. Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. Both are discretionary and have expiration dates. The word warrant simply means to “endow with the right”, which is only slightly different from the meaning of option.
In the investing world there are several ways to purchase stocks to ensure the most benefit can be earned for an individual purchaser. One of those ways to lock in prices for a predetermined amount of time is by exercising a warrant. A warrant means that someone or something is endowed with the right to perform an action. In investing, that means a warrant endows the holder to purchase a specified stock at a fixed price until the warrant expires. This makes warrants a form of security, wherein it secures the price, much like an option does.
When is a Warrant Offered
Warrants are generally offered when bonds are created by an individual company. The exchanges rarely list warrants, and information about warrants can be difficult to get ahold of as it generally isn’t passed along for free. Businesses offer warrants as a type of sweetener to attract buyers as they can lower the interest rate or enhance the yield of the bond. A detachable warrant can also be sold independently of the bond or stock, allowing the warrant itself to carry value in sale. Wedded warrants are created so that they are bound to the stock and cannot be separated. There are also covered warrants that are most oftenly issued by financial institutions and they don’t come with new stock being offered, they generally are provided because the institution already owns stock and is providing a warrant for the existing stock they hold.
When to Consider Purchasing a Warrant
Information is always the key to successful investing, and that holds true with warrants as well. When looking at a warrant, finding out the restrictions associated with it can help decide if it’s worth it. Generally there are two distinct types of warrants, American and European. An American warrant can be exercised any time before the expiration to acquire the stock, while European types can only be exercised only on the date of expiration. That’s a key restriction that could change the investing strategy when looking at the end goal.
Premiums are also a factor, and knowing how much of a premium is applied to the stock compared to purchasing the stock on the open market can make the stock less desirable when it is exercised via the warrant.
One last item of note when it comes to warrants is that they are becoming less common on the American markets, so if a warrant is specifically sought out, then monitoring German, Hong Kong and other international markets is where they are most likely to be found.