Warrant definition

A warrant is a security that gives the holder the right, but not the obligation, to buy or sell an underlying share at a set price before a set expiry date. That set price is called the exercise price or strike price.

A call warrant carries the right to buy the underlying security; a put warrant carries the right to sell it. A warrant's value depends on the underlying price, the time left to expiry, volatility, interest rates, and the specific warrant terms. Companies and financial institutions issue warrants to raise capital or to sweeten other deals.

A warrant differs from an option in who creates it. An option is written between market participants through an exchange and does not change the number of shares in issue. A warrant is issued by the company itself, or by a financial institution, and exercising a company warrant creates new shares, which dilutes existing shareholders.

Warrant Example

A company issues a warrant with an exercise price of USD 20, and you hold it. The company's share price later rises to USD 28.

The warrant is worth exercising, because it lets you buy the share for USD 20 while the market price is USD 28:

USD 28 - USD 20 = USD 8 of value per share