Warrants are high-risk, high-return investment tools that remain largely unexploited by investors
Most of us are familiar with financial
instruments such as stocks, derivatives, options, mutual funds, etc. Some of these
products also form a major part of our investment portfolio. In case, if some of us are
not aware of these financial instruments, there is ample information available in books,
newspapers and on Internet on these products. But have you heard about the term
‘company warrant’? Can a warrant certificate issued by a company comprise a part
of your investment portfolio? The obvious answer for most of us would be ‘Don't
The below article not only provides
information on what are company warrants, their types and characteristics but also what an
investor must keep in mind before buying a company warrant.
What are company warrants?
Company warrants are securities issued by a
company, usually during fresh offer of shares. The company issues warrants to raise
capital/funds for itself. Warrants give investors an option to diversify their portfolio.
Issued in the form of certificates, warrants give investors the right to buy shares in the
company at a specific price at a future date.
Companies generally offer warrants to
attract investors. Warrant holders can convert their warrant certificates into underlying
equity shares of the company within a given time period. Value of a warrant depends on the
value of the ordinary share which is the underlying security.
How do company warrants work?
Warrants cost a fraction of the price of
their underlying security and give the buyer the right (but not the obligation) to buy
this underlying security at a predetermined price (exercise price) on or before a
predetermined date (expiry). When an investor exercises the option to convert the warrant,
the company offers the underlying equity, which can be traded in the secondary market. The
value of a warrant can increase or decrease as the price of the share—to which it
relates. Warrants can be easily tracked by adding a ‘w’ alphabet after the
company’s ticker symbol to check the warrant's price.
Nooruddin Fidai, managing director, Analyse
India Market Solutions Pvt Ltd, explains, "Warrants are certainly more complex than
shares. They are risky in nature and you need to closely track the price movements of
company warrants before investing in them. You also need to evaluate whether they offer
good value or not at their current price. At the same time, warrant holders get no
dividends. They are therefore not appropriate for all investors—especially who are
looking for some source of income."
Warrant certificates mention particulars
regarding the investment tool they represent.
The underlying instrument which the warrant
represents is mentioned on warrant certificates.
All warrants have a specified expiry
date—the last day a warrant can be executed.
Types of warrants
There are two types of warrants: Call
warrant and put warrant.
A call warrant represents a specific number
of shares that can be purchased from the issuer at a specific price, on or before a
A put warrant represents a certain amount
of equity that can be sold back only to the issuer at a specified price, on or before a
Warrants: Exercise style
Then again, warrants are classified by
their exercise style: an American warrant can be exercised anytime before or on the stated
expiry date, and a European warrant can be carried out only on the day of expiration.
Warrants are usually long-term contracts.
Some warrants may have duration of 15 years. The longer the term, the more attractive the
warrant will be to investors.
Warrants are transferable. Investors can
sell a warrant to a third party. The price of the sale is completely determined by the
warrant’s owner and the buyer.
The cost of a warrant is lower compared to
the underlying equity shares and according to the terms, investors can convert their
warrant certificates to buy equity shares at a pre-fixed price and date. Therefore,
chances of making gains in a bull market are higher. But in a bearish market, the downside
will be limited to the price paid for the warrant.
In a bull market, if investors convert the
warrants into shares, they can acquire higher number of shares at a lower cost compared
with the market price of the same shares.
A warrant is a high-risk, high-return
investment tool. Sometimes, the value of the certificate can drop to zero. If that were to
happen before it is exercised, the warrant would lose any redemption value.
Warrants need to be exercised before the
pre-fixed date. If you don’t exercise warrants before the pre-fixed date, then the
Warrants can offer a smart addition to an
investor’s portfolio, but warrant investors need to be attentive to market movements
due to their risky nature.
A holder of a warrant does not have any
voting rights in a company. The investor can therefore have ‘no say’ in the
functioning of the company, though he is affected by decisions made.
A warrant tracks the price movement of an
underlying equity share but the investors do not get any dividend that the company may
have announced for shareholders.
Though investors invest their money in the
company, they do not have shareholders’ rights till the time the warrants are not
converted into shares.