In finance, a classic warrant is a security that gives the holder a right but not an obligation to purchase the underlying stock at a fixed price, before the warrant has expired. A European-style classic warrant can only be exercised (i.e. used to carry out the purchase) on the expiration date. An American-style classic warrant can be exercised on any date during the lifetime of the warrant.
Classic warrants are often attached as an extra bonus to make bonds or preferred stock more appealing to investors.
When a classic warrant is exercised, the corporation will give the warrant holder newly issued shares of stock. The exercise will therefore cause a stock dilution.
Examples of warrants
|A warrant issued in conjunction with a bond. Also known as a warrant-linked bond.
The warrant-linked bond gives the hold a right to acquire shares in the bond issuing entity.
|Cash or Share warrant||This warrant can be settled with cash or delivery of shares.|
|Covered warrant||A warrant where the issuer owns the underlying.|
|Naked warrant||A warrant issued without being attached to a bond. Banks and securities firms are the typical issuers of naked warrants.|
|Third party warrant||A warrant issued by a third party|
|Wedding warrant||A wedding warrant can be attached only of the host debentures are surrendered.|
|Call equity warrant||Gives the holder a right to buy equity.|
|Put equity warrant||Gives the holder a right to sell equity.|
|Exotic warrants||Unusual warrants are known as exotic warrants. There are many different warrants to be found in this heterogeneous category, and they often have colourful names – such as the Snail Warrant and the Hit Warrant.|
After being issued, the warrant can be traded in secondary markets. Warrants are over-the-counter (OTC) instruments, since warrants aren’t listed at exchanges. There are a few exceptions to this rule; some exchanges do have a small selection of listed warrants. You can for instance take a look at the assortment available at Deutsche Börse and the Hong Kong Stock Exchange.
A traditional warrant is very similar to a call equity option, but while call equity options tend to be issued by public options exchanges, warrants are more frequently issued by the corporation on which the warrant is based.
Another major difference between warrants and options is the lifespan. A typical option is valid for a few months or maybe a year. Options with a longer lifespan than this does exist, but they are rare. (Take a look at LEAPS if you are interested in options with a lifespan of 2-3 years.) With warrants, a lifespan that exceeds one year is the norm and some warrants have a life span of over 10 years from the day of issue.