Asides the normal equity instruments that are traded on the stock exchange, derivatives are also bought and sold. Derivatives are traded either on the stock market or offered by the companies themselves. One of such derivatives is the warrant. Usually offered by companies themselves, a warrant is a security that gives one the right but not the obligation to buy shares at a fixed period of time before it expires. The price is usually fixed and part of the contract. The price that this dynamic derivative would go for is what is regarded as the strike price. Once the time given to the warrant holder expires, there ceases to be any contract. Interestingly, Stock warrants usually take a few years to materialize. In essence, you can hold them for a long period of time – sometimes over ten years.
Stock Warrants are usually given by companies to investors or potential investors to get them interested in buying more shares. This is especially more effective when the riskiness involved in investing in a company is high. Since you can buy the shares of a company at a fixed price (which could either be favorable or not), the chances are that you’ll be more interested in the opportunity. Sometimes, warrants are even offered to preference shareholders or debenture holders so they can pay fewer interest rates and give fewer dividends out. As said, these stock warrants are not traded on the secondary markets but are handled by the companies themselves to avoid issues. Options, on the other hand, are much related to this only that they are traded on the secondary market.
The catch for Stock warrants is simple. Recipients or investors want to make again off it. The goal is to hold on until the stock price is higher than the strike price before it expires. This would make them eligible to sell and make extra money. Unfortunately, there are no guarantees. It could either result in profit or loss as the stock price could swing in any direction.
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Features of Stock Warrants
There are certain characteristics that make up a warrant. They include:
The strike price is the stipulated price for the warrant to be sold for at a specific time in the future.
The time lag is the period of leeway you are given before the expiration date of the warrant contract. It could be for a shorter period of time, but it is usually between five to ten or sometimes even more years.
The expiration date is usually clearly stated on the warrant contract. It is the date where the entire warrant would become null and void.
It would be faulty to offer a future price of purchase of shares, without putting a cap on the shares. You would literally just lose all your shares to investors who want to make it easy. Hence, there is always a set amount of shares that warrant holders are entitled to purchase for the future period, before the expiration date.