Warrants

We are exploring the concept of warrants in finance, an instrument that is frequently referenced, but often misunderstood. Warrants are a type of security that entitles the holder to purchase shares of a company at a specific price, known as the exercise or strike price within a set period. Although they may initially seem similar to options, warrants have unique features and play distinct roles in raising capital and structuring investments. By the end of this lecture, you will have a clear understanding of what warrants are, why they are issued, and how they function in both corporate finance and capital markets. Warrants are typically issued by companies as a means to attract investors, often alongside bonds or preferred stock. When a warrant is exercised, the investor pays the exercise price and receives newly issued shares from the company, resulting in potential dilution of existing shareholders. Unlike most exchange traded options, which are contracts between investors, warrants are contracts with the issuing company itself. When warrants are exercised, capital flows directly into the company. Warrants usually have longer maturities than options, sometimes lasting several years and can be freely traded on some stock exchanges, depending on the jurisdiction. There are several types of warrants, the most common being equity and covered warrants. Equity warrants give the right to purchase shares, while covered warrants, usually issued by financial institutions can reference shares, indexes, or currencies.