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Stock warrants are options issued by a company that trades on an exchange and give investors the right (but not obligation) to purchase company stock at a specific price within a specified time period. When an investor exercises a warrant, they purchase the stock, and the proceeds are a source of capital for the company.
However, a warrant does not mean the actual ownership of the stocks but rather the right to purchase the company shares at a particular price in the future. Warrants are not popular in the United States, but they are common in other countries such as China.
There are two kinds of warrants:
A call warrant is the right to buy a specified amount of shares from a company at a certain price in the future. A put warrant is the right to sell back a specified number of shares to the issuing company at a specific price in the future.
A warrant certificate is issued when an investor is granted a warrant. The certificate includes the terms of the warrant, such as expiry date and the final day it can be exercised.
A company may issue a warrant to attract more investors for an offered bond or stock. As a result, the company may obtain better terms on the bond or stock offering.
For example, when the company shares trade at $100 each, and the warrants are $10 each, more investors will exercise the right of a warrant, even if they lack enough capital to buy the stocks. The warrant represents a potential source of capital in the future when the company needs to raise additional capital without offering other bonds or stock.
Further, companies can issue warrants as a capitalization option when heading to bankruptcy. Issuing warrants provides the company with a future source of capital.
Also, a warrant may be issued as a way of preserving goodwill from the company’s shareholders. It will be more easy to convince shareholders to pay $10 per warrant than to purchase additional company shares at $100. However, warrants should be used carefully due to the quick gains or losses that they create.
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