How Do Stock Warrants Work?

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Having the ability to buy a stock at a fixed price in the future could put you in an advantageous position as an investor. This is exactly the scenario that can unfold when you own stock warrants. Stock warrants are similar to options in that they allow you to buy stock in the future. They are unlike options in that they are issued directly by a company.

Stock Warrant Basics

  • The basic idea behind a stock warrant is that it gives you the right to buy a certain number of shares of stock by a certain time in the future. As long as you exercise the warrant by the date in the future, you can buy the fixed number of shares at a price that was agreed upon when the warrants were issued. Companies often issue warrants as a bonus to investors who buy stock in the business.

Issuing More Stock

  • One of the features of a stock warrant is that when it is exercised, the company that issued it creates more shares of stock to give to the investor. Instead of simply buying some of the available shares of the stock in the market place, the company creates new shares to add to the shares in the market place. This has the effect of diluting the holdings of the other existing shareholders of the company.

Buying and Selling

  • While stock warrants are issued by the company directly to the investor, they can also be bought and sold in the market place. Once an investor receives a stock warrant from the company, he can turn around and sell that warrant to another investor. The warrant does not sell for as much as a share of stock, because it only represents the ability to buy a stock at a certain price and not the stock itself.

Warrants Compared to Options

  • Options are another financial instrument that are similar to stock warrants. While options share some of the same characteristics, they are not the same type of instrument. Options are a derivative instrument that are issued by those who own shares of the stock. Stock warrants are given directly from the company to the investor. Another difference is the amount of time that they last. Options typically only last a few months, while stock warrants could last for multiple years.

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