Ex-Warrant

What Is Ex-Warrant?

Ex-warrant describes a condition when a warrant is not passed on to the buyer as part of buying another security. In this case, the seller of a security that has (had) warrants attached would keep the warrants, rather than the warrants being passed to the buyer.

Warrants can be bought and sold, and are sometimes combined with other securities to entice investors to purchase those securities. When warrants are attached with other securities, they will trade together. Once a warrant goes ex-warrant it becomes its own product.

Understanding Ex-Warrant

An ex-warrant is a similar concept to an ex-dividend, which is when the stock no longer trades with the value of the dividend payment. When an investor buys a stock that is ex-dividend, they are not entitled to the dividend. To receive the dividend, they need to purchase the stock before the ex-dividend date.

In the case of warrants, the same logic applies. When a buyer purchases a security that is ex-warrant, they too are not entitled to the warrants.

Although ex-warrant and ex-dividend are similar in the treatment of purchaser entitlement, in practice they have little in common. Dividends on common stocks are fairly common. Warrants are far less prominent in the marketplace, as they're issued as a sweetener during the flotation of other securities or as a form of additional funding down the road. 

Cum warrant describes a warrant that comes with a particular security.

Understanding Warrants

A warrant is a specialized type of security that is usually issued with a bond or stock. In some ways, warrants resemble stock options. The warrant entitles the holder the opportunity to purchase a particular number of common stock at a specified price called the strike price. The strike price is generally set higher than the market price at the time of issuance. The ability to purchase shares at the strike price is usually available for a certain amount time, up to the expiry date, although it can be to perpetuity. 

Warrants are priced similar to call options in that they gain value as the price approaches and moves above the strike price, and warrants with a longer time until expiry will have more value than a comparable warrant with a shorter duration till expiry. This is because with more time there is a greater chance that the warrant will eventually move above the strike price.

Warrants are often issued as a form of sweetener—that is, they enhance or otherwise help make certain securities like fixed income more marketable. Warrants are freely transferable and trade on the major exchanges, meaning the recipient of warrants can sell them separately or detach them from the security they were issued with. But an investor buying a bond or preferred stock that came with warrants needs to recognize whether the security trades ex-warrant or not.

Example of a Bond Warrant Going Ex-Warrant

A company may entice investors to purchase their bonds by attaching warrants to the bond. The warrants allow the bond buyer to purchase shares at the strike price before the warrant expiry date. For example, the warrant may allow the purchaser to buy 100 shares of stock at a strike price of $15 within the next five years. The stock may currently be trading at $10. Even though the stock is below the strike price, the warrants still have value and potential. This is because over the next five years the stock price could appreciate above the strike.

The bond and warrant may be attached for a set period of time, up till the ex-warrant date. At the ex-warrant date the bond and warrant will become completely separate financial instruments, and can be bought and sold on their own. Prior to the ex-warrant date, the bond and warrant are attached. A buyer of the bond will be cum warrant; the warrants are with the bond. After the ex-warrant date, the bond seller doesn't include the warrants with the sale.