Difference Between a Warrant & an Option
Stock warrants and options are two financial trading instruments that use leverage to be profitable. They are often mistakenly considered two separate names for the same instrument; however, there are a myriad of differences. The primary difference is that a stock warrant is issued by the company from which the stock is derived from and a stock option is issued by the institution (or brokerage) owning the stock.
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Mechanics of a Stock Warrant
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A stock warrant is issued by the institution originating the stock and allows the bearer to buy shares of stock at a specific price (regardless of market price). For example, suppose you had a stock warrant for one share of stock at $10 and the market price is $50 per share. Upon exercising the warrant, your $10 purchase would give you a stock valued at $50. Should you decide to immediately sell that share, you would realize a profit of $40.
Mechanics of a Stock Option
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Stock options are issued by the institutions owning the stock and allow the bearer to buy, and immediately sell, stocks at a predetermined price. For instance, if you had a stock option for one share at $50 and the market price is $75, exercising your option would allow you to buy one share at $50 and immediately sell it for $75, leaving you with a profit of $25.00.
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The Involved Parties
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The purchase of a stock warrant is between the company and the purchaser. Stock warrants directly benefit the company for which the stock is issued. Stock options are between a brokerage house, which owns the stock, and the purchaser. The exercise of the stock option does not directly benefit the company.
Option and Warrant Expirations
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Stock options generally have a short life span to be exercised. Should the option expire before becoming profitable, it becomes worthless. Stock warrants are generally designed to bolster investment in the company and usually command a much longer lifespan (as much as 15 years in some cases).
Flexibility
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Stock options offer greater trading flexibility; they can be used for a variety of trading strategies. Stock warrants are much more rigid, they can be purchased and exercised only as outlined in the warrant.
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