Stock Warrants: What They Are & How to Trade Them

What are stock warrants? It’s a question I get a lot from traders…

When you’re trading with a small account, it’s common to look for lower-priced securities so you can buy more shares.

You may have heard of options trading. But when you look at the platform in your brokerage account, it can be confusing. It’s a whole different world from the stock exchange. 

Well, there’s another type of security that functions similarly to options but is easier to find … It’s called a stock warrant. 

You can search for stock warrants in the same place you search for stock tickers. As long as your broker supports them. 

But what is a warrant, exactly? And is it worth the risk? In this post, I’ll take a closer look at this often overlooked way to trade.

What Is a Stock Warrant?

A stock warrant gives a buyer the opportunity to buy a company’s shares at a predetermined price. That price is the “strike price.” 

And there’s no obligation to buy them — only the option. The choice is yours. 

Typically, you have up to 15 years to exercise (use) your right to purchase the shares. If the share price rises, you’ll have the right to buy at the agreed-on price. With a potentially nice profit.

That means you get the security of buying shares “on sale” knowing they’ve already appreciated.

If the share price falls, you don’t have to buy the shares. However, your warrants will expire and they’ll be worthless.

Keep in mind that the warrant price will differ from the common stock price (it’s usually cheaper). And you’ll need to exercise the warrant before it expires if you want to lock in a profit.

What Does Warrant Mean in Stocks? 

A warrant is like an IOU. When you buy a warrant, the company owes you the right to buy their stock at a specific price.

The best strategy is to buy warrants early on if you think the stock price will rise. They’re usually priced lower than the stock early on … until volume comes in.

There will be a deadline to exercise the warrant and buy the stock. But the deadlines are often years away. They can be as many as 15 years out.

Be sure to research the details before you dive in. 

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Why Does a Company Issue Stock Warrants?

Lots of reasons. Some companies issue stock warrants as a perk to big-time investors.

Institutional investors make big purchases that move markets. Given their buying power, they expect companies to sweeten the deal. They don’t want to pay retail. Just like companies that manufacture products give discounts to buyers who place large orders.

If a company’s stock is riskier in nature, it can offset some of the risk with warrants.

Companies looking to raise capital may offer warrants on the open market.

Sometimes companies offer stock warrants as a benefit to employees. This can keep current workers happy and attract new talent to the team. Companies tend to put restrictions on when these warrants can be exercised. So an employee might have to stick it out a few years before realizing the benefit.

How Do Stock Warrants Work? 

So how do stock warrants work? Warrants are active for a limited time. After their expiration date, they become worthless unless sold.

It’s up to the holder to decide the best time to sell. The company share price will fluctuate from day to day.

Stock warrants are often attached to bond sales. They act as a sort of bonus for tentative investors. If the stock price rises above the exercise price, the bondholder is in luck. They can sell the warrant at a profit.

Warrants don’t entitle the holder to shareholder voting rights or dividends.

You can buy warrants any time before their expiration date.

Stock Warrants vs. Stock Options: What’s the Difference?

On the surface, stock warrants and stock options appear to work in similar ways. But there are key differences. And those small details can have a big impact.

One important difference is that companies themselves issue stock warrants. So there’s a direct benefit to the company if they rise in value.

The company also has the power to issue new shares through warrants. This is a common way for companies to raise funds. 

Stock options are not direct securities. Traders buy and sell options on the secondary market. And they can only trade shares that are already on the market — they can’t issue new ones. 

There’s also a difference in deadlines. You buy stock options for a set number of shares, and they always expire in a year or less. 

Stock warrants are more versatile. You can buy various numbers of shares through a warrant. One warrant can equal one, five, 20, or 100 shares. It’s up to the company.

With warrants, you also have a longer time to exercise your shares. It’s common for deadlines to extend as long as 15 years out.

Benefits and Disadvantages of Stock Warrants

Warrants allow you to potentially buy more shares with less money. And they’re often cheaper than a company’s common stock.

This can help minimize risk. And if you have a small account, you can trade shares you otherwise might not be able to afford.

But if you don’t exercise your warrants by their expiration date, they’ll be worthless. You lose your original investment. Of course, if the stock price drops below your strike price, this could be the best deal for you.

You don’t have to buy the shares on top of the warrants. You’re only out what you invested in the warrants.

Still, no one likes the feeling of a guaranteed loss.

5 Types of Stock Warrants

There are many types of stock warrants. It’s important to know what you’re getting into before you buy. 

Picking the right security for your trading personality type will help you feel more at ease. Especially when you’re trading an unfamiliar security. 

Each type of warrant offers a different amount of risk to reward. 

Puttable Warrants

A put warrant specifies the amount of equity you can sell back to the company at a certain price. It has a predetermined expiration date.

Callable Warrants

A call warrant guarantees your right to buy a specific amount of shares at a specific price. It also has a predetermined expiration date.

Naked Warrants

Naked warrants allow the holder to exchange the warrant for a security. They’re not tied to a preferred stock or bond.

Covered Warrants

Financial institutions, not individual companies, issue covered warrants. They allow the holder to buy or sell a certain amount of securities at a predetermined date. These could be stocks, currencies, or other financial instruments.

Wedded Warrants

Wedded warrants come with bonds attached. Investors buy and sell them together. If the holder wants to exercise the warrant to get their stock, they must also sell the bond.

Traditional Warrants

A traditional warrant is usually attached to a bond. This allows the bond issuer to provide a lower coupon rate. Holders can detach these warrants from the bond and sell them on the secondary market. 

How to Buy Stock Warrants

You buy stock warrants the same way you would buy common stock. Stock and warrant tickers exist side by side on the exchanges.

The warrants will usually have an extra letter on the ticker symbol. Take DraftKings Inc. (NASDAQ: DKNG). When the company went public, it issued both common stock shares and warrants.

The common stock shares traded under the ticker DKNG, while the warrants used the ticker DKNGW. They later delisted the warrants — but many holders had done quite well by then.

Where to Buy Stock Warrants

The best way to buy stock warrants is through your broker. But not all platforms are equal.

When you exercise a warrant, you’ll need to use a traditional platform like Schwab or TD Ameritrade. Not all brokers currently support warrants.

If you want to trade warrants, it’s smart to research which brokers offer them first. A great broker gives access to a variety of instruments.

How to Trade Stock Warrants

There’s far more to trading warrants than the steps below, but let’s get a brief overview…

Know What You’re Buying

The number of shares you have a right to buy or sell varies with each warrant. A warrant may guarantee your right to one, 10, 20, or 100 shares … Read the fine print before you buy.

Check the Expiration Date

If the stock price is less than the strike price, the warrant may still have “time value.” As long as you have good reason to believe the stock price will increase before the warrants expire.

Give Notice

Stock warrants let you give a “heads-up” when you intend to exercise your warrants. The company must issue new shares to honor your right to buy them. This creates some share dilution.

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What Happens When Stock Warrants Expire?

If the stock warrant expires before you exercise your right to use it, you lose the value. Like an option, you must redeem it to lock in your potential gains or losses.

American stock warrants allow holders to buy or sell any time before the expiration date.

European stock warrants require holders to exercise warrants on specified days.

Are Stock Warrants Taxable?

Yep, profits from exercising stock warrants are taxable. And unlike stock options, warrants don’t get preferential treatment. In fact, they’re taxed as ordinary income.

Here’s how you calculate the profit that gets taxed: Take the difference between the strike price and the share price. Then subtract the cost basis from that number. That’s a basic overview and not intended as financial advice. Hit up a licensed tax pro in your area for all the details.

How Are Stock Warrants Taxed?

Here’s an example … Imagine your warrants have a strike price of $10 per share to buy 100 shares of the desired company. You paid $500 to buy these. So your total investment is $1,500.

Let’s say it works out. The market price on the day you exercise your shares is $50, making the shares worth $5,000. The difference between $5,000 and $1,500 is your profit. And that $3,500 is classified as ordinary income.

Technically, you didn’t own shares before exercising the warrants. So they’re not considered capital gains. It’s a lot to think about. Consult a tax professional to make sure you’re following the required tax rules.

What Is a Common Stock Warrant?

A common stock warrant is a security that gives you the right to buy a stock at a specific price. The predetermined price is the strike price.

Warrants tend to be cheaper than common stocks. Investors with less capital can potentially buy more shares.

But there’s a catch. The warrants come with an expiration date. And while that expiration date can be very far off, if you miss it, you lose everything you invested. And dividends, if a company pays them, can lower the strike price. 

Stock warrants are usually offered by more speculative companies — so they can be riskier as well as volatile.

When you exercise warrants to buy a stock at the strike price, the company issues new shares. This creates share dilution.  

Are Warrants Good to Trade?

If you can buy the stock warrant while it’s cheaper than the price of the common stock, it might work out. Especially if you believe the shares will continue to rise. 

The share price must rise enough to cover the cost of the warrant and your exercising the warrant … Plus extra gains so you can make a potential profit. 

If it isn’t cheaper to buy the warrant and exercise it at the predetermined price, it might not be worth your time. You might as well buy the common stock directly.

Besides, there are plenty of small-cap stocks on the market with hot catalysts. You can be in and out of a profitable trade the same day. No need to wait for expiration dates. 

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Frequently Asked Questions

Let’s get into more details on stock warrants…

Are Stock Warrants Good or Bad?

It depends on your trading goals and strategies. For the everyday trader, they’re not necessary. There are plenty of listed low-priced stocks on the market. If these fit your risk tolerance, trading derivatives isn’t necessary. 

How Do I Check Stock Warrants?

It’s pretty easy to find stock warrants by searching for them. If you’re trying to find out if a specific company offers warrants, check the company ticker plus a “W” or “WS”. Once you’ve confirmed the details, look for the ticker at your preferred broker. 

How Do Warrants Affect Stock Price?

When investors choose to exercise their warrants, companies must issue new shares. This causes share dilution. The impact on the stock price will vary depending on the number of shares. Warrant prices tend to rise or fall in tandem with the corresponding stock. But sometimes, one will outpace the other in volume.

Can You Sell a Stock Warrant?

Yes. There are a couple of ways to sell warrants after you’ve bought them.

If the current stock price is above the strike price, it makes sense to exercise your warrants and turn a profit. But if the current stock price is below the strike price, it doesn’t make sense to sell your warrants. It would be better to buy the stock itself at the cheaper price point.

If you want to raise funds by selling your warrants, make sure you have lots of time left until expiration. If there’s lots of time value on your warrants, you might be able to sell them on the secondary market.

Stock Warrants: The Bottom Line

Stock warrants are a cost-effective and versatile trading instrument. If you understand what you’re buying, you can potentially come out ahead. 

But like all derivatives, they’re complex and nuanced. Be sure to read the fine print before you buy or sell them. 

At the end of the day, they’re one more tool in your toolbox. And it’s always good to understand what’s out there, regardless of whether you choose to use it. 

That said, I think for most people, it’s best to start with common stocks. It’s the simplest way to get a feel for how the market moves. 

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Have you traded stock warrants? How did it go? Would you trade them again? Leave a comment!