A stock warrant is a type of security offered by private companies that gives the holder the right, but not the obligation, to purchase a certain amount of common stock at a stated price, at a future time. Companies often include warrants to sweeten a new-issue offering. It can also improve shareholder confidence, if the underlying value of the security increases overtime.
The two types of warrants are the put warrant and the call warrant. A put warrant corresponds to a certain amount of equity that the buyer can sell back to the issuer at an agreed price and at a stated time. A call warrant represents a specific number of shares that the buyer can buy from the issuer at an agreed price and time. While the warrant usually corresponds to shares of stocks, it can also represent a currency, an index or a commodity.
The agreed price at which to buy a call warrant or sell a put warrant is called the 'strike' or 'exercise price'. The conversion ratio means the number of warrants required in order to buy or sell one investment tool. If the conversion ratio is high, the price of the share, index or commodity will be low.
A stock warrant is very attractive to people seeking medium- to long-term investments, and to hedgers and speculators. Warrants are quoted certificates that are transferable and with high transparency, making it a viable option for private investors as well.
A downside to the stock warrant is that its value can drop to zero. If this happens before it is exercised, the warrant would have lost any redemption value. Also, the holder of a stock warrant does not have the rights of a shareholder to vote or to reap dividends. While the stock warrant owner does not have a say in the running of the company, they will be affected by any decision made by the board of directors.
A stock warrant can be a smart addition to any investor's portfolio, but the investor would have to monitor market movements due to the risky nature of warrants. Stock warrants offer an opportunity for diversity without competition from large, market-dictating institutions.
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