Warrant

By
rjonesx
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What is a ‘Warrant’

A warrant is a derivative that confers the right, but not the obligation, to buy or sell a security – normally an equity – at a certain price before expiration. The price at which the underlying security can be bought or sold is referred to as the exercise price or strike price. An American warrant can be exercised at any time on or before the expiration date, while European warrants can only be exercised on the expiration date. Warrants that confer the right to buy a security are known as call warrants; those that confer the right to sell are known as put warrants. 

Explaining ‘Warrant’

Warrants are in many ways similar to options, but a few key differences distinguish them. Warrants are generally issued by the company itself, not a third party, and they are traded over-the-counter more often than on an exchange. Investors cannot write warrants like they can options. Unlike options (with the exception of employee stock options), warrants are dilutive: when an investor exercises her warrant, she receives newly issued stock, rather than already-outstanding stock. Warrants tend to have much longer periods between issue and expiration than options, of years rather than months.

Types Of Warrants

Traditional warrants are issued in conjunction with bonds, which in turn are called warrant-linked bonds, as a kind of sweetener that allows the issuer to offer a lower coupon rate. These warrants are often detachable, meaning that they can be separated from the bond and sold on the secondary markets before expiration. A detachable warrant can also be issued in conjunction with preferred stock; often the warrant must be sold before the investor can collect dividends. 

Trading Warrants

Trading warrants can be difficult and time-consuming, as they are for the most part not listed on stock exchanges, and data on warrant issues is not readily available for free. When a warrant is listed on an exchange, its ticker symbol will often be the symbol of the company’s common stock with a W added to the end. For example, Abeona Therapeutics Inc’s (ABEO) warrants are listed on Nasdaq under the symbol ABEOW. In other cases, a Z will be added, or a letter denoting the specific issue (A, B, C…).

Further Reading

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