Warrants, like stock options, are derivative financial securities that confer the right to sell or to purchase shares of stock at a certain price for a set duration of time.Warrants, like stock options, are derivative financial securities that confer the right to sell or to purchase shares of stock at a certain price for a set duration of time. However, warrants differ significantly from stock options because warrants are issued and guaranteed by the company itself, rather than transferred without guarantees by third parties. Warrants are regarded as less volatile, more stable investments by many individuals because of the guarantees provided by the issuing company.

    Warrant definition

    A warrant is defined as a derivative security that allows the holder to buy or sell shares of stock for a certain amount up to and until the warrant’s date of expiration. Warrants are issued by the company that issued the original shares of stock, and offer certain guarantees to investors that are not available with standard stock options. Another difference between standard stock options and warrants is the duration of the agreement; most stock options expire within weeks or months, while warrants typically last for years. Because warrants are purchased directly from the company, they usually are options on new shares issued by the company rather than existing shares already in circulation.

    Why warrants?

    Like other derivatives, purchasing a warrant allows investors to insure themselves against undue risk by hedging against major moves in the price of a stock. Warrants are even more desirable, however, since they are obtained directly from the company whose stocks are being traded and thus come with guarantees that typical options cannot provide. Additionally, warrants are typically written for longer periods of time than standard derivatives and thus provide additional flexibility for investors who are looking for a solid hedge prospect; perpetual warrants, for instance, have no expiration date.

    Callable warrants

    Also known as call warrants, callable warrants offer investors the right to buy shares of a company at a specific price at a future date. Callable warrants generally have an expiration date, and are sold by companies to raise capital for various projects or expenditures. Callable warrants are considered bullish, since the investor is speculating that the worth of the shares will increase and exceed the cost of purchasing those shares in the future.

    Putable warrants

    Putable warrants are sometimes referred to as put warrants, and are used to confer the right to sell shares of a company back to that company at a future date prior to the expiration of the warrant. Putable warrants are bearish, since in order to produce a profit the shares must decrease below the sale amount listed on the face of the warrant.

    Warrants are often incorporated as part of an overall corporate strategy when releasing new shares of stock into the financial market. Because warrants are generally a long-term investment option and allow investors to hedge against dramatic changes in the price of their shares, they can increase the level of investor confidence in the company’s stock offerings.

    Tim Ord
    Ord Oracle

    Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

    Day Trading Simulator

    Tradingsim.com provides the ability to simulate day trading 24 hours a day from anywhere in the world. TradingSim provides tick by tick data for...

    Send this article to a friend.

    Enter multiple addresses on separate lines or separate them with commas.