Warrant

In finance, a warrant is good...not bad, like it would be in the case of an arrest. Instead, it's more like a warranty.

A warrant is a type of derivative security that gives the rights to the warrant-holder to buy the underlying stock of the security at the “exercise price” (a fixed, predetermined price) until the expiry date (like a warranty, they don’t last forever).

If you know what stock options are, you might be thinking, “hmmm, a warrant sounds a lot like a stock option..” and you’d be right. They are alike. Warrants differ from options in two ways: first, warrants are issued by the company that owns the stock (not another investor), and second, warrants are put into play only for new shares.

Or, said another way, it’s a cute option. Like, kind of a stock option…light.

Ok, so it pretty much feels just like a stock option. And yes, there are put warrants and call warrants in the same vein as put options and call options.

So then, what’s the difference? Why don’t we just call a warrant a stock option?

Well, warrants are usually issued by the company itself, whereas stock options on, say, Microsoft can be issued by anyone who deals in options. Like…Goldman, Morgan, UBS, Sumitomo…whoever…whatever investment bank that makes capital markets trading happen.

They can all create derivative securities on stocks or bonds of their own volition...and the company itself really has no say as to whether or not they do. Goldman Sachs, Morgan Stanley, and the others then offer trading in those options on exchanges in regular form, such that many buyers and sellers generally come together liquidly to trade and generate profit margins for the desks at the banks trading the securities.

Got that? Ok, another difference: Warrants can last 5 or 10 or 20-plus years. That’s usually how many weeks options last. And the question remains: why would a company issue what are essentially cheap stock options to others to buy slices of its own pie?

Well, the answer, as with most of these types of company deals, is that the company has to issue those warrants to get a deal done to settle a patent dispute to create a distribution or manufacturing partnership or some other tactical arrangement to make the good better...and to make the problems...go away.

Warrants generally are simply held for the duration of the partnership, or of the company’s existence as an independent entity. Conversely, options are traded liquidly on exchanges all over the world.