Stock Warrants

Definition: The Stock Warrants are like the options that give the holder the right, but not the obligation to buy or sell the security at a specific time and a specific date. Unlike options, these are issued by the company itself and are traded more over the counter than on an exchange.

The stock warrants are issued to “sweeten the debt issues”, as with the purchase or sale of these warrants, the company holding such stock can raise money through equity, which is not possible in case of the options. Also, the investors cannot write (put) the warrants as in the case of options (except the employee stock options). The warrants enjoy the benefits of elongated maturity period over the options, as the former can last up to 15 years, whereas the latter generally expires in two to three years.

The purpose of the issue of warrants is that the companies include these into the debt or equity issues, as this helps in reducing the cost of financing and getting the assurance of additional capital in case the stock does well.

The stock warrant certificate comprises of the following:

  • Type of Warrant: There are two types of warrants, Viz. Call Warrant and Put Warrant. The call warrant gives the holder a right to buy certain shares at a specific time on or before the certain date while the Put warrant gives the right to sell these.
  • Exercise Price: The exercise price or the strike price is the amount that needs to be paid either for the purchase of a call warrant or the sale of a put warrant.
  • Expiration Date: On the warrant certificate, the date on which the warrant will get expired is clearly mentioned and after which the holder cannot exercise any rights.
  • Underlying Asset: The underlying security for which the warrant seller is obliged to deliver or purchase from the warrant buyer is clearly stated in the warrant certificate.
  • Warrant Style: It refers to the manner in which the warrants can be exercised. There are two styles: American and European style. In the former style, the warrants can be exercised any time before the expiration date, whereas in the latter style the warrants can be exercised on the expiration date itself.
  • Conversion Ratio: It refers to the number of warrants that are needed to buy or sell one unit of investment.

The companies usually add the warrants with its new securities or offerings and therefore whenever the investor exercises his warrant, he gets the newly issued stock rather than the existing outstanding stock. Due to this, the warrant causes the dilution as the company is obligated to issue new shares whenever the investor exercises his warrant, which is not in the case of options, where the investors get the stock from the existing common shares of the company.

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