Warrants: the right to buy shares later at a set price

A warrant is a financial instrument that gives you the right to buy a company's shares later at a fixed price. This guide explains what warrants are, how they work and how they differ from options.

Quick answer

A warrant is a security issued by a company that gives the holder the right, but not the obligation, to buy its shares at a set price before a set date. Warrants are often issued alongside other securities to raise money, and the holder gains if the share price rises above the set price.

Key takeaways

• A warrant is the right to buy shares at a set price.
• It has an expiry date by which it must be used.
• It is issued by the company itself.
• The holder gains if the share price rises enough.
• Warrants are often attached to other fundraising.

What is a warrant?

A warrant is a security that gives its holder the right to buy a set number of a company's shares at a fixed price, called the exercise price, before a certain expiry date. The holder is not obliged to buy.

Warrants are issued by the company itself. When a holder exercises a warrant, the company issues new shares to them at the set price, bringing fresh money into the company.

How do warrants work?

If the market price of the share rises above the exercise price, the warrant becomes valuable, since the holder can buy shares cheaply and they are worth more in the market.

If the share price stays below the exercise price, the warrant may expire worthless, because there is no benefit to buying at a price higher than the market.

How are warrants different from options?

A key difference is that exercising a warrant creates new shares from the company, while an exchange-traded option is usually settled with existing shares. Warrants also tend to have longer lives.

Why do companies issue warrants?

Companies often issue warrants alongside other securities, such as in a preferential allotment, to make an offer more attractive. The warrant gives investors a chance to buy more shares later if the company does well.

It is also a way to raise money in stages, since the company receives funds first when the warrant is issued, and again if it is exercised.

What should investors know?

Warrants can offer upside if the share rises, but they can expire worthless, so they carry real risk. Their value depends on the share price and the time left before expiry.

Understanding warrants helps you read fundraising announcements that include them. Any investment decision should be your own after proper research and reading all related documents.

Frequently Asked Questions