How Do Stock Warrants Differ From Stock Options?

Stock Warrants vs. Stock Options: An Overview

A stock warrant gives the holder the right to purchase a company's stock at a specific price and at a specific date. A stock warrant is issued directly by the company concerned; when an investor exercises a stock warrant, the shares that fulfill the obligation are not received from another investor but directly from the company.

An equity stock option, on the other hand, is a contract between two people that gives the holder the right, but not the obligation, to buy or sell a stock at a specific price, prior to a specific date, referred to as the contract expiration date.

Key Takeaways

  • A stock warrant represents the right to purchase a company's stock at a specific price and at a specific date.
  • A stock warrant is issued directly by a company to an investor.
  • Stock options are purchased when it is believed the price of a stock will go up or down.
  • Stock options are typically traded between investors.
  • A stock warrant represents future capital for a company.

Stock Options

Options are purchased by investors when they expect the price of a stock to go up or down (depending on the option type). For example, if a stock currently trades at $40 and an investor believes the price will rise to $50 next month, he or she could purchase a $40 call option today, which would give them the right to purchase the stock at that price prior to contract expiration. Then, the investor could turn around and sell it for $50, making a profit of $10, less the cost of the option, referred to as the "premium."

Stock Warrants

When an investor exercises a warrant, they purchase stock, and the proceeds are a source of capital for the company. A warrant certificate is issued to the investor when they exercise a warrant. The certificate includes the terms of the warrant, such as the expiry date and the final day it can be exercised.

However, the warrant does not represent immediate ownership of the stocks, only the right to purchase the company shares at a particular price in the future. Warrants are not extensively used in the United States, but they are more common in China.

There are two types of warrants: a call warrant and a put warrant. A call warrant is the right to buy shares at a certain price in the future, and a put warrant is the right to sell back shares at a specific price in the future.

Key Differences

A stock warrant differs from an option in two key ways: a company issues its own warrants, and the company issues new shares for the transaction. Additionally, a company may issue a stock warrant if they want to raise additional capital from a stock offering. If a company sells shares at $100 but a warrant is just $10, more investors will exercise the right of a warrant. These warrants are a source of future capital.

Stock options are listed on exchanges. When stock options are exchanged, the company itself does not make any money from those transactions. Stock warrants can last for up to 15 years, whereas stock options typically exist for a month to two to three years.

Therefore, for long-term investments, stock warrants may be a better investment than stock options because of their longer terms. However, stock options may be a better short-term investment.

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