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What is meant by stock warrants and how does it works ?

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A stock warrant give its holder right but do not put any obligation to buy an underlying security at certain price known as exercise price at pre decided future date. It is very much similar to options as an option contract also gives its holder a right to buy/sell a particular underlying security at pre decided date and price, however there is no such obligation to do so. Using demat account and trading account traders can trade in such financial instruments.
Types of warrants
1) Call Warrant
It represents a specific number of shares that holder can purchase from issuer at pre decided price on or before expiration date.
2) Put warrant
It represents specific number of shares which holder can sell back to the issuer at pre decided price on or before expiration date.
Working of warrants
When a buyer wants to buy a warrant then he pays a warrant premium i.e price of warrant in exchange of which he receives right to buy/sell certain number of stocks at strike price however there is no obligation on him to do so. All the required conditions like strike price, expiration dates and any other restrictions are stated to buyer to which he agrees. The buyer presents the warrant when he wants to exercise it. For call warrant he pays the strike price and for put warrant he delivers the stocks the issuer. The issuer then issues the number of shares (for calls) or pays the strike price (for puts) to the buyer.Call warrants works similarly as stock options but put warrants works opposite to it.


Key differences between warrants and options
1) Warrants are not exchange traded as they can be customized according to the needs of company.Options are standardized and always traded over the exchange.
2) Options are exercised within one year but in-case of warrants expiration date is often years after the issue date.
3) When a warrant is exercised new shares are issued by company but not in case of options.
4) Options are traded in secondary market whereas warrants are traded in primary market.
5) Underlying assets in case of warrants are bonds, indices and in options are currencies, international shares.

Both the financial derivatives are useful for business and have their own advantages and disadvantages. Traders should be very careful while trading in warrants as they are highly speculative and leveraged financial instrument. To minimize brokerage cost traders can go for services of discount brokers as they offer wide range of brokerage services by charging very less amount as compared to other traditional brokers.
Pehla trade is a growing discount brokerage firm . You can open free demat account with us in minimum time. We charge flat Rs1/executed for beginning one month. Join us and save your huge brokerage cost.
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