Defining Stock Warrants

Warrants are a good alternative investment vehicle for investors.  Investors can make it a part of their investment portfolio to allow the leverage of having diversity in their portfolio. However, given that the basic understanding by investors is very little in warrants compared to equities, not all investors prefer to look towards using warrants as an alternative investment vehicle. Various companies offer warrants without charging any premium, or by charging a very nominal premium to same, with the debt instruments they offer, so as to find additional takers to such instruments to raise funds, as many people see warrants commanding better valuation in market, at a later date, once the stock price of such a company moves up, and warrants can be exercised to buy such shares at value lower than market value.

Defining warrants

A warrant or call warrant basically gives the holder the right, but not the obligation, to purchase a specific number of underlying shares at a specific price within a specific period, if terms are attractive enough.

They are often included in a new debt issue as a "sweetener" to attract investors and simultaneously create a room to raise fresh funds for a company, to convert them at a pre-determined value of shares, or as per some method, typically acceptable to allow a win-win situation for, both the companies, and to allow investors covert the same at a small discount to market value of shares.

However, the warrant holder does not have any voting or dividend rights as that enjoyed by shareholders, till he converts the same into shares at a later date. Once the warrant holder decides to convert the same into equity shares, the company gets the advantage of raising additional funds at a future date, some years after the allotment of warrant.

Typically, the cost of warrant and risk associated with same is restricted to a small premium he pays to acquire them initially.