Series 7: 1.4.1. Warrants

1.4.1. Warrants

A warrant is a financial instrument that gives the holder the right to purchase securities from an issuing company at a specific price in the future. When warrant holders execute their right to buy shares, it increases the number of shares outstanding in the market, thereby diluting the holdings of existing shareholders.

The cost to purchase a warrant on the secondary market is called a premium. By purchasing a warrant, the owner receives the right to buy a set amount of stock at a specified price (referred to as the strike price) in the future. This right to buy may be exercised at any time up to a stated termination date, after which the warrant will expire. Warrants are meant to be kept for a relatively long time before use, usually 2 to 10 years, and are usually not worth anything until the company’s stock has increased in value. Warrants are issued at strike prices that are quite a bit higher than the market price of the security. The idea is that, over time, the stock price will rise significantly above the strike price. At this point, the buyer can present the warrant to the issuer and purchase shares at the strike price, profiting from the difference between the market price and the strike price.