Stock Warrant Benefits
Stock warrants are derivative securities that work like stock options. When you purchase warrants you get the right (but not an obligation) to buy or sell shares of the underlying stock at a guaranteed price for a specified time period. Stock warrants are issued by corporations, however, not created by third parties as are options. Warrants are usually "add-ons" when a company issues new stock and are intended to increase investors' interest.
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Leverage
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"Call" stock warrants allow you to buy the underlying shares at a predetermined strike price. Since the price of the warrants is normally a good deal, less than the price of the stock itself, this provides leverage. That is, you can buy more warrants with a given amount of money, increasing your potential return. For instance, suppose a stock is selling for $20. You buy 100 shares for $2000. If the stock rises to $30 per share you can sell for $3000, earning $1000 profit. But if you buy stock warrants that are selling at $10, you can buy enough warrants for 200 shares. If the stock goes to $30 per share the warrants will rise to $20. When you sell the warrants, you receive $4000. Your profit has doubled to $2000.
Expiry
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A stock warrant typically has a much longer expiry (time until it expires) than a stock option. Options expire in a few months to at most 5 years. A stock warrant expiry is frequently 10 years, 15 years or even longer from the date of issue, which allows you to leverage longer term investment opportunities. For example, during a bear market you can buy stock warrants for a very low price because the underlying stock is depressed. A long expiry allows you to wait out the market downturn and reap an excellent return.
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Risk Management
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For investors considering buying stock in a start-up company, "put" stock warrants serve to reduce risk. Put stock warrants give you the right to sell the stock at a guaranteed strike price. Startup firms often issue put stock warrants for this reason. If the company (and therefore the stock) does well, the put stock warrants won't have any value. If the company's stock falls in price, however, investors can still recover the strike price by exercising the warrants. This risk-reducing strategy makes the firm's stock much more attractive to investors.
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