Definition
The term stock warrant is used to describe certificates that entitle the holder to purchase shares of common stock at a given price and within a prescribed timeframe. Stock warrants are frequently included as a feature on bonds or preferred stock issued by a company to increase investor interest and lower the cost of the bond or preferred stock.
Explanation
Companies will issue stock warrants for a number of reasons. The right to purchase shares could be included as a feature with a bond or preferred stock issue to increase investor interest. They can also be part of a preemptive right provided to existing holders of common stock, allowing them to purchase new shares when issued. Warrants can also be issued as part of a private equity deal. Finally, stock options provided to employees as part of their compensation package are actually stock warrants.
Convertible securities and call options are different than stock warrants. A call option is a stock market exchange instrument, while warrants are issued by the companies themselves. Convertible securities, such as bonds, are exchanged for common stock, while warrants provide the holder with the right to purchase shares at a given price.
The important features of stock warrants include:
Exercise Price: this is the price paid per share of common stock, and would typically include a premium when compared to the current market price of the company's common stock.
Expiration Date: the last date the holder of the warrant has the right to purchase shares at the exercise price. Unlike a call option, which expires in months; a warrant's expiration date can be ten or more years in the future.
Exercise Restrictions: while an American warrant can be exercised any time before the expiration date, European warrants can only be exercised on the expiration date.
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