Warrants

Warrant is a derivative security that gives the holder the right to purchase securities (usually equities) from the issuer at a specific price within a specific time frame. These are generally issued along with new debt issues as a “sweetener” to entice investors ot allow the issuers to pay less interest rate or dividends.

Warrants are tradable and their price fluctuates as per the fluctuation of the underlying stock.

Say, a company issues new share at $50 and at the same time gives shareholders warrants entitling them to buy shares at $100 anytime until 5 Jan, 200X.

The warrant holder will exercise the option of converting the warrant into share only when the share price exceeds $100. Below $100, the warrant is ‘out of the money’ and it is worthless.