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Stock Warrants, Options & Stock Purchase Agreements

How to Invest in Stock Warrants

A stock warrant is a certificate that gives the holder a right to buy a specific amount of securities at a certain exercise price. Warrants are generally issued in conjunction with a preferred stock or bonds, and signify the right to acquire shares in the issuing corporation.

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Warrants and options are two contractual financial documents that permit the holder particular rights to purchase securities. Both instruments are discretionary and have termination dates. Stock purchase warrants provide owners the right to purchase securities at a predetermined price. When the stock warrant issued by a corporation is exercised, the corporation issues new shares of stock, so the quantity of outstanding shares rises. However, when an option is exercised, the holder of the option obtains a share on the open market.

A wide range of stock warrants can be issued by a corporation, including preferred stock warrant, convertible stock warrant, and common stock warrant or equity warrant. The reasons for issuing one type of stock warrant may be different from the reasons for issuing another type. Each warrant has its own advantages and shortcomings, voting structure, and tax implications.

Types of Warrants

Equity warrants are warrants in which the underlying security is a stock. Equity warrants can be put and call warrants. Put warrants give the holder of a warrant a right to compel the issuing corporation to issue the securities at a fixed price after definite contractual stipulations are met. Call warrants give the issuing corporation the right to compel the holder of a warrant to exercise the warrants and sell a specified number of shares at a certain price after particular contractual stipulations are met.

Preferred stock warrants are warrants with attributes of both equity and debt instruments. Preferred stock warrants are superior to equity stock warrants but secondary to bonds. Convertible stock warrants provide an option to the preferred stock holders to convert the preferred shares into a fixed number of equity shares. In the case of preferred stock warrants, stockholders may need to detach and sell the warrant before they can receive preferred dividends payments.

Stock warrants can be used in mergers and acquisitions. The selection of a method of payment is a major issue in mergers and acquisitions. In mergers and acquisitions, by purchasing all of the warrants and stock options, the purchaser is entitled to the economic advantage of the exercise price of those warrants and options.

A warrant agreement is a document that governs a warrant issue. It is a written statement stipulating the terms of a warrant issue or a warrant purchase. Since each warrant is different, and the terms and conditions in a warrant agreement play a significant role in determining the warrant's value.


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