Warrant

Warrants are similar to call options, but with a key difference: they are issued by the company itself, and when they are exercised, the company creates new shares. This means warrants can dilute existing shareholders.

Companies often attach warrants to bonds or preferred shares to make them more attractive to investors, allowing them to borrow at lower interest rates. Warrants may also be issued in restructurings, to lenders or as part of special purpose acquisition company deals.

For example, a warrant might give the right to buy one share at 20 at any time over the next five years. If the share price rises to 26, the warrant has an intrinsic value of 6. If the share price stays below 20, the warrant may expire worthless.

Warrants usually have much longer lives than exchange-traded options, often several years. Some are traded on stock exchanges separately from the bonds or shares they were issued with.

Because a small investment in warrants can produce large gains or losses relative to the share price, they carry high risk. When analysing a company, investors should consider outstanding warrants, since their exercise would increase the number of shares.