In finance, holding a call (stock) warrant gives you the right to purchase the underlying stock at a fixed price. If it is a European-style warrant, it can only be exercised on the expiry date. If it is an American-style warrant, it can be exercised on any day until it expires. Warrants are often attached to bonds or preferred stock as an extra bonus. If you elect to exercise your classic call stock warrant, the issuer (the company on which the warrant is based) will issue new stock to hold up their end of the deal. The effect is stock dilution.
A warrant doesn’t have to be a call warrant; put warrants are available as well. A put stock warrant (also known as a puttable stock warrant) gives the holder the right to sell the underlying stock at a fixed price.
If a warrant can be settled with cash or stocks, it is called a “Cash or Share warrant”. With such a warrant, the writer doesn’t have to actually buy or sell any shares.
There are many different types of warrants. The classic type is the warrant issued in conjunction with a bond as an extra bonus. This warrant, as so called warrant-linked bond, gives the holder the right to purchase shares in the bond-issuing entity. As mentioned above, new stocks will be issued to honor a call stock warrant.
When a warrant is issued without being attached to a bond, it is called a naked warrant. Naked warrants are typically issued by banks and other financial institutions.
Third party warrants are just what the name says – warrants issued by a third party. If the issuer ensures underlying backing, e.g. by purchasing enough stock to honor the warrant, it is called a covered warrant.
A wedding warrant can be attached only of the host debentures are surrendered.
These are just a few examples of available warrants. Diving deeper into the world of warrants will let you encounter exotic warrants such the Snail Warrant, the Hit Warrant, the Turbo Warrant, the Locked-In Return Warrant, and the Widow Barrier Warrant.
Warrants vs. Options
Warrants and options have many things in common. A classic call (stock) warrant is very similar to a call stock option. Just like the option gives you an option to buy or sell something, the warrant never bestows the holder with any obligation to carry out a transaction. Another important similarity between warrants and options is that they both come with an expiry date and become worthless after this date.
An important difference between options and warrants is their likelihood to be traded on exchanges. Today, highly standardized options are traded on exchanges all over the world. Warrants on the other hand, are still seen as OTC instruments. There are exceptions though; warrants are traded on the Hong Kong Stock Exchange and on the Deutsche Börse.
As mentioned above, both warrants and options come with an expiration date. However, there are certain differences here. An option typically have a life-span of a few months top, even though exceptions exist. LEAPS (long-term equity anticipation securities) are among the most long-lived options available, and they still tend to have a lifespan of 2-3 years or less. When it comes to warrant, it is very easy to find warrants where the expiration date is many years into the future – sometimes 10+ years!