Stock Options and Warrants
A stock option is a contract between two people that gives the holder the right, but not the obligation, to buy or sell outstanding stocks at a specific price and at a specific date. Options are purchased when it is believed the price of a stock will go up or down (depending on the option type). For example, if a stock currently trades at $40 and you believe the price will rise to $50 next month, you would buy a call option today so that next month you can buy the stock for $40, then sell it for $50, and make a profit of $10. Stock options trade on a securities exchange, just like stocks.
A stock warrant is just like a stock option because it gives you the right to purchase a company’s stock at a specific price and at a specific date. However, a stock warrant differs from an option in two key ways:
- A stock warrant is issued by the company itself
- New shares are issued by the company for the transaction.
Unlike a stock option, a stock warrant is issued directly by the company. When a stock option is exercised, the shares usually are received or given by one investor to another. When a stock warrant is exercised, the shares that fulfill the obligation are not received from another investor, but directly from the company.
Advantages of Stock Warrants
Companies issue stock warrants to raise money. When stock options are bought and sold, the company that owns the stocks does not receive any money from the transactions. However, a stock warrant is a way for a company to raise money through equity. A stock warrant is a smart way to own shares of a company because a warrant usually is offered at a price lower than that of a stock option. The longest term for an option is two to three years, while a stock warrant can last for up to 15 years. So, in many cases, a stock warrant can prove to be a better investment than a stock option if mid- to long-term investments are what you seek.