Warrant

A warrant is a derivative security issued directly by a company that grants the holder the right — but not the obligation — to purchase the company's stock at a predetermined price (called the exercise or strike price) before a specified expiration date. Warrants are similar to call options but differ in key ways: they are issued by the company itself (not traded between investors), exercising them creates new shares (diluting existing shareholders), and they typically have much longer expiration periods — often 5 to 15 years or even perpetual in some cases. Companies issue warrants for several purposes: as sweeteners attached to bonds or preferred stock to make these securities more attractive to investors, as part of SPAC (Special Purpose Acquisition Company) units, as compensation to investment banks or advisors, or as part of private placement deals. Warrants are often traded on exchanges just like stocks once detached from the original security. The value of a warrant depends on its intrinsic value (the difference between the stock price and the strike price, if positive) and its time value (the premium attributed to remaining time until expiration). Because warrants represent future dilution, a company's fully diluted share count includes outstanding warrants. Investors should note that when warrants are exercised, the company receives cash (the exercise price times the number of shares) and issues new shares, increasing shares outstanding.