A stock warrant and a stock option are financial contracts between two parties that grant the buyer the right to buy or sell shares of stock at a set price within a defined period of time.
Stock warrants and stock options are similar investment securities that can be used to generate a profit or used as leverage in an investment portfolio. This article will explain the similarities and differences of each of these securities.
A stock option is a contract that gives the buyer the right, but not the obligation, to buy or sell shares of underlying stock at a strike price by an expiration date. There are two types of options: calls and puts.
Call options grant the buyer the right to buy shares of the underlying stock at the strike price by the expiration date. Put options grant the buyer the right to sell shares of the underlying stock at the strike price by the expiration date.
Call options are bought when an investor expects the underlying stock’s price to rise. Put options are bought when an investor expects the underlying stock’s price to decrease.
Stock options can be traded on exchanges, just like stocks.
A stock warrant is similar to a stock option because it gives the buyer the right to buy or sell shares of underlying stock at a set price on a specific date. There are call and put warrants that function similarly to call and put options.
A major difference between stock warrants and stock options is how they originate. Stock options are listed on exchanges, whereas stock warrants are issued by the company itself. When a stock option is exercised, the shares of the stock are received or given from one investor to another. When a stock warrant is exercised, the shares of the stock are received not from another investor, but from the company itself.
Companies issue warrants to raise capital. When stock options are exchanged, the company itself does not make any money from those transactions. Therefore, a stock warrant is a way for the company to raise capital through equity. Stock warrants allow investors to own shares of a company at a price lower than that of a stock option.
Stock warrants exist for long terms that can last up to 15 years. Stock options usually exist for a month, with some lasting at most two to three years.
For long-term investments, stock warrants may be a better investment than stock options because of the longer life-span of warrants. On the other hand, stock options may be a better investment for short-term investments. All in all, stock options and stock warrants are both good investments to generate a profit or hedge a loss from a stock’s price move.
