Rebecca Baldridge, CFA, is an investment professional and financial writer with over 20 years' experience in the financial services industry. In addition to a decade in banking and brokerage in Moscow, she has worked for Franklin Templeton Asset Mana.
Rebecca Baldridge Investing WriterRebecca Baldridge, CFA, is an investment professional and financial writer with over 20 years' experience in the financial services industry. In addition to a decade in banking and brokerage in Moscow, she has worked for Franklin Templeton Asset Mana.
Written By Rebecca Baldridge Investing WriterRebecca Baldridge, CFA, is an investment professional and financial writer with over 20 years' experience in the financial services industry. In addition to a decade in banking and brokerage in Moscow, she has worked for Franklin Templeton Asset Mana.
Rebecca Baldridge Investing WriterRebecca Baldridge, CFA, is an investment professional and financial writer with over 20 years' experience in the financial services industry. In addition to a decade in banking and brokerage in Moscow, she has worked for Franklin Templeton Asset Mana.
Investing Writer Lisa Dammeyer Deputy Editor, Investing & RetirementWith more than six years' experience an editor, investing specialist Lisa Dammeyer brings a keen eye for detail and fact-checking chops to everything she works on. Her work over the past four years at various financial publications has helped investo.
Lisa Dammeyer Deputy Editor, Investing & RetirementWith more than six years' experience an editor, investing specialist Lisa Dammeyer brings a keen eye for detail and fact-checking chops to everything she works on. Her work over the past four years at various financial publications has helped investo.
Lisa Dammeyer Deputy Editor, Investing & RetirementWith more than six years' experience an editor, investing specialist Lisa Dammeyer brings a keen eye for detail and fact-checking chops to everything she works on. Her work over the past four years at various financial publications has helped investo.
Lisa Dammeyer Deputy Editor, Investing & RetirementWith more than six years' experience an editor, investing specialist Lisa Dammeyer brings a keen eye for detail and fact-checking chops to everything she works on. Her work over the past four years at various financial publications has helped investo.
| Deputy Editor, Investing & Retirement
Updated: Jul 30, 2024, 7:58pm
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A stock warrant is a contract that lets you buy or sell shares of a company’s stock at a specific price on a specific date. Warrants are similar to options contracts, although there are certain big differences between the two.
For the average retail investor, derivatives like warrants and options aren’t really necessary. Though they can help to diversify a portfolio, given the risk they carry from leverage, investors need to be very attuned to price changes and market volatility.
A stock warrant is a derivative contract between a public company and an investor. A warrant gives the holder the right to buy or sell shares of stock to or from the issuing public company at a specified price before a specified date. Holders of warrants are under no obligation to buy or sell the underlying stocks.
Like options contracts, warrants carry a strike price. This is the price per share at which the holder can buy or sell the stock. They also carry an expiration date after which they become useless.
Typically one warrant gives the holder the right to buy or sell one share of stock. When the warrants are exercised to buy a stock, the company issues more shares—these new shares are dilutive for existing shareholders, meaning they diminish the concentration of ownership the shares previously had.
Though you receive shares directly from the company when you exercise warrants, they can be held in a normal trading account with an online broker. You simply buy or sell them as you would a stock.
There are two types of warrants: put warrants and call warrants. Put warrants allow holders to sell shares of stock they already own while call warrants allow investors to buy shares of stock.
Most warrants are call warrants, which let holders buy a stock at a specified strike price during a certain period that ends on the warrant’s expiration date. An investor should only exercise the call when it’s in the money, meaning that stock’s market price is greater than the exercise price.
Consider a call warrant with a strike price of $110. If the market price of the underlying stock is priced at or below $110, the investor should allow the warrant to lapse. But if the underlying stock price is $150, the investor should exercise the warrant and get a $40 discount when buying one share of the company’s stock.
Put warrants give the holder the right—but not the obligation—to sell a specified number of shares back to the issuer at the strike price. Put warrants are exercised at the strike price and are in the money only when the market price falls below the strike price.
To continue the example from above, that would mean the underlying stock would need to be valued below $110–otherwise, they would lose money.
Warrants of all types are classified based on how you’re able to exercise them. An American warrant can be exercised anytime on or before the expiration date while European options can only be exercised on the expiration date. Both types of warrants are issued in both the U.S. and Europe.
Warrants also often have a conversion ratio. This specifies the number of warrants necessary to buy or sell one share of stock. If a conversion ratio is 4:1, it means that it takes four warrants to buy one share.
Companies issue warrants for a variety of reasons:
Holders of warrants don’t enjoy many of the tax benefits that shareholders do. In the context of employee compensation, options may receive more favorable tax treatment while warrants do not.
When they’re exercised, warrants generate taxable income on the difference between the exercise price and the stock price, less the amount paid for the warrant. They are taxed as capital gains since the warrant holder does not own shares in the company. Income is taxed as ordinary income on exercise, which can be troubling if you’re in a high tax bracket.
Warrants and options are similar in certain regards:
Warrants and options differ in a few key aspects:
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Investing WriterRebecca Baldridge, CFA, is an investment professional and financial writer with over 20 years' experience in the financial services industry. In addition to a decade in banking and brokerage in Moscow, she has worked for Franklin Templeton Asset Management, The Bank of New York, JPMorgan Asset Management and Merrill Lynch Asset Management. She is a founding partner in Quartet Communications, a financial communications and content creation firm.
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