@

Warrants

What Is A Warrant?

A warrant is a security that gives the holder the right to purchase a company's stock or bond at a specific price by a certain date.

Warrants are similar to options, but warrants are issued directly by a company, usually as an incentive to get investors to buy the company's stock or bonds. Options, by contrast, are a contract between two parties in which the holder has the right to buy a security or asset at a specific price and time. Warrants generally are effective for as long as 15 years, while options are short-term contracts that usually last for less than a year.

Warrants have no voting or dividend rights. If the warrants are exercised, the company must issue new stock or bonds.

How Do Warrants Work?

The most notable example of how warrants work is when Berkshire Hathaway agreed to buy $5 billion of preferred stock from Bank of America during the financial crisis in 2011, at a time when the bank's future was in serious doubt.[1] As part of the deal, Berkshire was given warrants to buy 700 million shares of the bank's common stock at a price of US$7.14 a share.

At the time, the bank's shares were trading at about US$7 a share, meaning the warrants were essentially worthless. However, in 2017, when the bank's shares had more than tripled to US$24, Berkshire exercised the warrants, earning a US$12 billion profit and becoming the bank's largest shareholder in the process.[1]

Put And Call Warrants

There are two types of warrants. Call warrants are the most common, and they give the holder the right to buy shares at a certain price in the future. And then there are put warrants, which give the holder the right to sell their shares back to the company at a predetermined price. In the first case, the investor would profit if the price of the underlying stock went up, while the put warrant would provide downside protection if the price went down.

Summary

Warrants are securities that give the owner the right to buy a company's stock or bonds at a predetermined price at a specified future date. Warrants are similar to options except that they are issued directly by a company, usually as an inducement to buy the company's shares or bonds.

Disclosure

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Risk Warning: Our service includes products that are traded on margin and carry a risk of losses in excess of your deposited funds. The products may not be suitable for all investors. Please ensure that you fully understand the risks involved.