Longer-term stock warrants are typically good for up to 15 years. Stock options are shorter-term. They can expire in just weeks or in two or three years.
How Stock Warrants Work
Warrants are good for a fixed period of time. They’re worthless once they expire. But the date is sometimes automatically extended under terms set by the company if the warrant isn’t exercised by that deadline. The investor might have an additional two years. The most frequent way warrants are used is in conjunction with a bond. A company issues a bond and attaches a warrant to the bond to make it more attractive to investors. The investor can redeem the warrant and buy the shares at the lower price if the issuing company’s stock increases in price above the warrant’s stated price. The stock is coming directly from the company. It’s not being purchased from another investor. The warrant expires if the stock never rises above the strike price. It becomes worthless. Warrants are more popular outside the United States, particularly in China. Warrants come with no voting rights. They pay no dividends. U.S. stock warrants allow for purchase up until the expiration date. But this isn’t necessarily the case for overseas warrants.
Types of Stock Warrants
A “put” warrant sets a certain amount of equity that can be sold back to the company at a given price. A “call” warrant guarantees your right to purchase a set number of shares at a certain price. Both have dates of expiration. Different types of warrants have different degrees of risk and value:
Traditional Warrants
These are the warrants that are sold in conjunction with bonds. This allows for a lower coupon rate on the bond. They can often be detached and sold on the secondary market.
Naked Warrants
These warrants also allow the holder to exchange the certificate for a securities purchase, but they’re not tied to a bond or preferred stock.
Wedded Warrants
Wedded warrants must remain attached to the bond. This means that the bond must also be surrendered if the holder wants to execute the warrant to get shares.
Covered Warrants
Covered warrants are issued by financial institutions, not by individual companies.
