Warrants
A warrant is a financial instrument that gives the holder the right to purchase securities from the issuing company at a specific price within a specified time frame. The time specified for a warrant usually extends from two to ten years. By allowing the purchase of shares from the issuing company, warrants tend to increase the number of shares outstanding in the market and dilute the holdings of existing shareholders.
Warrants are usually offered in conjunction with a new issuance of equity or debt as a sweetener to entice investors. For example, a bond issue may include a warrant for the company’s stock, allowing the company to pay a lower yield on the bond issue. A new stock issue may prove more attractive to investors if a warrant is offered as part of the package.
Buyers of a warrant pay a premium for the right to buy a set amount of stock at a stipulated price called a strike price. This right to buy may be exercised at any time up to a stated termination date, after which the warrant will expire. At the time of issuance, the strike price normally is quite a bit higher than the price of the security, s