Warrants in finance refers to a security that enables the holder of the warrant/security to buy the underlying stock of a company under certain perimeters such as at a fixed rate, amount of stock, and time frame. Warrants are similar to Options because of the parameters used for purchasing the stock of a company. In investing, warrants are quite desirable to the investor because they increase the holder’s confidence in a stock by allowing them to lock in a certain price to buy the stock, but also allows them the option to not buy the stock. One of the biggest differences between options and warrants is that warrants are issued by the stocks company while options are issued by the stock exchange. As well, warrants can have much longer expiry times while options are generally short-term instruments.show more
Warrants provide investors with certain advantages over other investment vehicles. See some of these advantages below.
Warrants allow the buyer of a company’s underlying stocks to pay a smaller price for market exposure. The way this works is that a buyer buys the warrant of a stock or security and the price of the warrant is only a small percentage of the asset itself. Therefore, the investor has a greater chance at larger profits in terms of investment.
An investor can never lose more than what’s initially paid for the warrant, which is a much smaller amount than if they were to invest in the underlying asset.
Investors can buy warrants that are based on the worlds leading financial assets for a minimal cost. Investors are granted access to the worlds largest multinational companies, top indices, currencies, and commodities. Warrants are a much easier and cost-effective way to get involved with these premium assets.
Holders of warrants benefit from having years until the expiration date which allows the holder to wait and invest at the most opportune time. This allows the investor to observe how a share performs before investing, and also allows the investor to put off selling if their share is disappointing.
While there are various advantages to warrants, there are also disadvantages to them, just like any other investment vehicle. See some of the potential disadvantages of warrants below.
While warrants do have relatively long expiration dates, especially compared to options, they still do expire which means if your underlying asset does not perform how you’d like you will lose the premium you paid for the warrant.
Warrants cause the price movements to be largely magnified causing for highly volatile price movements of more than 50% in a day. While this can result in greater profits, losses are also magnified.
Warrants for highly volatile assets are more expensive because they have the potential for greater returns. Therefore, the return on investment is not as large as it may seem. Also, if the underlying asset performs poorly the investor could lose the entire high premium they paid for the warrant.