Difference Between Similar Terms and Objects

Difference Between Warrants and Options

stock-marketWarrants vs Options

Options and warrants are two common derivatives traded in stock and derivative exchanges. Both are options to purchase stock at a fixed price. Characteristically, both derivatives share similar leverage features. It is no wonder that they are often thought to be the same. They may almost behave alike but they are totally different instruments.

A security that entitles the holder to buy stock of the issuing company at a specified price (exercise price) is called a warrant. It is usually issued with other instruments by companies. Example of this is a debenture attached with warrants. They are also often used to enhance the yield of the bond to make them more appealing to would-be buyers. The expiry of this derivative may be up to several years.

Companies issue warrants because they want to raise money. Warrants allow the company to make money via selling stocks to the warrant holder. In warrants, the contract is between the issuer — financial institutions and banks — and the investor. Warrants issuers are the ones who set the terms of the contracts.

The exercise price is already set and as an investor, you would want to exercise your warrant when the share is priced higher than the exercise price. For every transaction, new shares are issued by the companies thus, the number of outstanding shares increases.

A stock option is greatly different from the warrant in terms of issuing. Basically, an option is a contract between traders/investors. It gives the option holder the entitlement to buy or sell outstanding stocks at a specific price and date. The terms of the contract is standardized by the stock exchange.

When an option is exercised, an investor receives the shares from another investor and not directly from the company like warrants do. Companies won’t receive any monetary benefit from the transaction with options. It is simply a transaction from trader to trader.

Options have expiry terms in months, which is usually in three months. When an exercise is made, there are no additional shares created. A particular investor has acquired an already existing share from an assigned the call writer. Writing or shorting is making an option sale. This is one characteristic that warrants do not have since they are issued by companies.

Summary:

1. Warrants are contracts between an investor and a company that issues shares while options are contracts between two investors.
2. Warrants’ lifetime is usually expressed in years whereas options’ lifetime is measured in months.
3. Warrants, since they are issued by a company, cannot be freely shorted unlike options that can and should be shorted.
4. New shares are created when warrants are exercised. In options, shares are only traded.
5. Companies won’t benefit from options but will definitely benefit from warrants.


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1 Comment

  1. There is a movie about naked short selling called “Stock Shock”–great dvd. Netflix and Amazon it on DVD or it’s cheaper at http://www.stockshockmovie.com

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