A warrant is a kind of a paper agreement that entitles a person to purchase and sell securities at an arranged price before or at the expiration date. The price can be called either the strike price or exercise price. There are different classifications of warrants. They may be divided into an American warrant and a European warrant. While the second one may be used only within the expiration date, the first one may be used whenever a holder of the warrant wants to, the only condition is that it must be utilized by the time it expires. Also warrants are divided into call warrants and put warrants. Call warrants entitle their own to purchase securities and put warrants entitle their own to sell securities.
Main principles of Warrants
Warrants are not very different from options, there are some small features that help to distinguish them. While options can be issued by any investor, warrants can’t. Warrants may be issued by a company or by an organization and normally warrants are traded over-the-counter, not on a stock market. Moreover, there is not much time to use an option as it has a shorter exercising period than a warrant. Warrants, in turn, tend to have years before it expires.
Warrants tend to cause a reduction of security. Using their warrants investors get securities that just have been produced, not those that are already in use. Also, warrants don’t give their holders the right to get dividends or to vote. Investors need warrants in order to limit risks of losing money, make their own position more stable and get more benefits.
It’s worth noticing that nowadays warrants are still popular in China and Germany.
Kinds of Warrants
Traditional warrants. This kind is also called warrant-linked bonds as they must be produced together with bonds, thus, an emitter may have both, a satisfied holder since he receives a warrant and a bond and own benefit since the emitter gives a coupon with a lower rate. Although a warrant and a bond were issued together, they may be separated and after that the warrant can be sold. These warrants are called detachable. Bonds can be replaced with stocks.
Wedded warrants. Also they’re called wedding warrants. It has the same work’s principles, the only difference is that these warrants aren’t detachable, thus, they can be sold separately and must be exercised together with the bond.
Covered warrants. Also they’re known as naked warrants. Some financial institutions are prone to produce such kinds of warrants, but it should be noticed that no new stocks are produced together with warrants. Thus, the name covered refers to the fact that the institution already possesses some underlying shares or is able to possess. Underlying shares may be currency, commodity, etc.
How to distinguish Warrants from others
Since most warrants are not listed on markets, it may be hard to get details about them and trade. Moreover, sometimes investors must pay for the warrant information. Nevertheless, after a warrant is finally on the stock market it has a special feature that helps to distinguish it from the others. Usually this is letter W in the end of the ticker symbol of its issuing company. For example, Heartbeam Inc has a symbol ticker BEAT, thus, its warrant has a ticker BEATW. It also may have Z or other letters, which refer to a particular issue.