A:

A stock option is a contract between two people that gives the holder the right, but not the obligation, to buy or sell outstanding stocks at a specific price and at a specific date. Options are purchased when it is believed the price of a stock will go up or down (depending on the option type). For example, if a stock currently trades at $40 and you believe the price will rise to $50 next month, you would buy a call option today so that next month you can buy the stock for $40, then sell it for $50, and make a profit of $10. Stock options trade on a securities exchange, just like stocks.

A stock warrant is just like a stock option because it gives you the right to purchase a company's stock at a specific price and at a specific date. However, a stock warrant differs from an option in two key ways:

  1. A stock warrant is issued by the company itself
  2. New shares are issued by the company for the transaction.    

Unlike a stock option, a stock warrant is issued directly by the company. When a stock option is exercised, the shares usually are received or given by one investor to another. When a stock warrant is exercised, the shares that fulfill the obligation are not received from another investor, but directly from the company.

Companies issue stock warrants to raise money. When stock options are bought and sold, the company that owns the stocks does not receive any money from the transactions. However, a stock warrant is a way for a company to raise money through equity. A stock warrant is a smart way to own shares of a company because a warrant usually is offered at a price lower than that of a stock option. The longest term for an option is two to three years, while a stock warrant can last for up to 15 years. So, in many cases, a stock warrant can prove to be a better investment than a stock option if mid- to long-term investments are what you seek.

RELATED FAQS
  1. I own some stock warrants. How do I exercise them?

    A stock warrant gives the holder the right to buy shares at a certain price before expiration. Learn how to utilize these ... Read Answer >>
  2. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
Related Articles
  1. Investing

    Understanding Warrants and Call Options

    Understand the fundamentals of warrants and call options, and find out how these securities contracts are quite similar, but also have some notable differences.
  2. Trading

    Warrants: A Risky But High-Return Investment Tool

    Discover the advantages and disadvantages of warrants, a largely unexploited investment vehicle.
  3. Investing

    Investing in Stock Rights and Warrants

    Learn why many companies choose to issue rights or warrants as an alternative means of generating capital and how their value is determined.
  4. Trading

    NYIF Instructor Series: Warrants

    In this short instructional video Anton Theunissen explains what a warrant is and how it works.
  5. Investing

    Take Advantage of Employee Stock Options

    If your employer offers stock options, they can contribute to your long-term financial success. Here's how.
  6. Trading

    Options Pricing

    Options are valued in a variety of different ways. Learn about how options are priced with this tutorial.
  7. Trading

    Trading Options on Futures Contracts

    Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying call or put options based on the direction ...
RELATED TERMS
  1. Warrant

    A derivative that gives the holder the right, but not the obligation, ...
  2. Call Warrant

    A call warrant is a financial instrument that gives the holder ...
  3. Warrant Premium

    The warrant premium represents the cost of purchasing a share ...
  4. Warrant Coverage

    Warrant coverage is an agreement between company and shareholders ...
  5. Covered Warrant

    A covered warrant is a security that offers the right, but not ...
  6. Currency Warrants

    A currency warrant is a financial instrument used to hedge currency ...
Trading Center