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Definition of Stock Warrants

Post on: 10 Июнь, 2015 No Comment

Identification

A stock warrant is a derivative that guarantees the holder a specific price (called the strike price) for a certain number of shares of common stock until the warrant expires (called the expiry date). Warrants either give the investor the right to buy the stock at the specified price (a call warrant) or to sell it at a specified price (a put warrant). Common stock warrants are valid for much longer periods than options (up to 15 years).

Function

The key feature of stock warrants is that they offer a way to leverage stock purchases. The extent of leverage is called the gearing ratio. If you buy call warrants for $5 with a strike price of $10 and the stock is selling for $15, the gearing ratio is 3:1. If the stock rises to $20, an investor who bought the shares outright makes a 33 percent profit. However, if you purchased warrants, the profit of $5 per share doubles the money you invested in the warrants—a 100 percent return.

Features

One feature of warrants that is confusing to some beginners is that it often takes several warrants to buy one share of stock. Exactly how many is called the conversion ratio. If the conversion ratio is 4, multiply the price of the warrant by 4 to see how much money you need to buy warrants for a single share of stock, and know how much leverage the warrants give you. Investors also must be aware that some European stock warrants can only be exercised on the expiry date. In the United States, warrants can be exercised at any time on or before the expiry date.