Derivatives: introduction to warrant - what is a warrant
A warrant, also known as a share warrant, is very similar to an option (see STSM112010 ) which gives the warrant holder the right, but not the obligation, to subscribe for a specified quantity of an underlying security (i.e. stocks and shares) at a specified ‘strike’ price per share i.e. the warrant exercise price within a specified future date.
A warrant is issued by a company, giving the holder a right to purchase new shares in that company.
A warrant is sometimes referred to as being ‘uncovered’ because the exercise of a warrant followed by the payment of subscription money creates a new issue of stocks or shares which were previously not in existence.
But, unlike a traded, traditional, or Over The Counter option, a warrant is issued by a company and is generally used as an enticement to investors, often being bundled with another registered class of the company security, to subscribe for further new shares in the company.
For example, the description and class of ABC Ltd company shares may be offered for sale as ordinary 50p shares + warrants (1: 4) at £4.50 share expiry 2009.
In addition to purchasing one ordinary 50p registered ABC Ltd share, the investor acquires the right, but not the obligation, to buy four new shares at a specified price (the warrant exercise price) direct from the issuing company, namely ABC Ltd at a specified future date. If the warrant is exercised, then additional payment is required to purchase the new shares.
When an investor purchases ordinary UK registered shares in a company with a warrant attached, the registered shares and attached warrant can be onward traded as a single entity. In such a situation, the registered shares and attached warrant is said to be traded ‘cum-warrant’. Alternatively, a shareholder can detach the warrants from the registered shares and onward trade the registered shares and warrants separately. In this situation the sole trading of a warrant is said to be ‘ex-warrant’.
A warrant is very similar to an option (see STSM112010) but with much longer time spans, normally twelve to eighteen months but can be up to five years.
See STSM112030 for the meaning of ‘specified date’
See STSM112080 for the meaning of a Traded Option
See STSM112090 for the meaning of a Traditional Option
See STSM112100 for the meaning of an Over The Counter (OTC) transaction