Introduction to Stock Warrants: Why Stock Warrants Are Issued and What They Represent
If you understand call options and how they work, then you are well on your way to understanding a stock purchase order. They share many of the same characteristics, at least at the definition level. Like a call option, warrants have an exercise price and an expiration date, but unlike a call option, neither the exercise price nor the expiration date are standardized.
These terms are set forth in the company’s SEC filings and can typically be found using a Bloomberg terminal or by speaking with your broker (who can then look them up in a Bloomberg terminal).
The warrants may be publicly traded or issued in a private placement transaction. If they are publicly traded, they will trade on a stock exchange like a stock. Warrants trade in shares like a stock does, not in contracts like a call option does.
Warrants are generally issued with an expiration date between three and five years after the original issue date. There may also be a period of time immediately after issuance when warrants are not exercisable. For example, an order may be issued with this description: “This order is exercisable for a period of three years beginning six months from the date of issuance.”
Warrants can be issued for a wide variety of reasons:
- Warrants can be issued when a company goes public, so that the warrants begin trading at the same time as the initial public offering of shares.
- Warrants can be issued after a company goes public to raise additional capital
- A court may order the issuance of warrants as part of a settlement or court decision, and
- Warrants may be granted in an acquisition or spin-off
An unusual feature of a warrant, as opposed to a listed option, is that the issuing company can change the terms of the warrant. This is not normal practice, but it can and does happen, but in most cases, the change in terms is beneficial to the warranty holder. The objective of the company that issues the warrants is that they are exercised, contributing additional capital to the company. For this reason, a change in terms, should it occur, is typically an extension of the time granted to exercise the warrants or a reduction in the exercise price of the warrants.
Investors can use warrants as an investment vehicle, just like common stock. They may also be used to hedge another related position, or as an arbitrage component in a position involving common stock or common stock options. A warrant can be a valuable financial tool and adds an additional avenue by which the company issuing the warrant can invest or trade.