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What is a Warrant? Meaning.

A Warrant is a security that gives the owner the right, but not the obligation, to purchase (Call Warrant) stocks at a set price (usually higher than the market price at the time of issuance) within a specific (long) time frame. A Perpetual Warrant has no expiration date and lasts forever. A Put Warrant is the right to sell stocks at a set price within a specific time frame.

Warrants are a financial instrument not unlike an put option or call option, but, when they are exercised, new shares of stock are created, whereas when an option is exercised, the owner of the option receives an existing share that is delivered by a counterparty. However in the case of employee stock options likewise new shares are created and issued by the company upon exercise.

In contrast, subscription rights also give a right to buy common shares, but normally at a set price which is lower than the market price at the time of issuance, and within a limited time frame of 2 to 4 weeks.

A Traditional Warrant is typically issued by the owner of the underlying instrument together with a bond or preferred stock in order to make buying the fixed income securities more attractive. A Naked Warrant or Covered Warrant is however issued by banks and securities firms, who are normally not the issuer of the underlying instrument. Both forms can be freely transferred and are traded on exchanges.

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Compare with: Bond  |  Subscription Right  |  Preferred Stock  |  Call Option  |  Put Option  |  Employee Stock Options  |  Treasury Stock  |  Unissued Stock

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