Stock warrants and stock options have proved out to be great alternatives to conventional stock investments. However, investors often get confused between these two contracts when planning their investments. Today, we will take a look at stock warrants and stock options and also find out about the key differences between them..
Stock warrants are contracts which entitle the warrant holder with a right to buy the stocks of a particular company at a pre-defined price on a certain date in the future. Stock warrants are issued directly by the company. In case, a warrant holder decided to exercise his warrant, the demand of shares in that case will be fulfilled directly by the company.
However, stock options work very differently. Options are a derivative contract between two people which provide the option holder with a right and no obligation for buying or selling a stock at a pre-defined price on a certain future date which is known as the contract expiry date.
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How Do Stock Warrants Compare to Stock Options
What are stock warrant?
As we know, stock warrants are contracts which provide the warrant holder with a right to buy the stocks of a particular company at a pre-defined price on a certain future date. When such a warrant contract is exercised, it becomes a source of capital gain for the company. The investor is provided with a warrant certificate when he exercises his warrant. The certificate consists of all warrant details including the terms, expiry date etc.
Warrant does not ensure ownership of any stock; it is only a contract which provides the holder with a right to buy the stocks at a pre-defined price on a certain date in future. Depending on the need, an investor can choose between call warrant and put warrant.
What are Stock Options?
Stock Options are derivative contracts which are bought by investors when they anticipate that the price of a stock or commodity will rise or fall in the future. For example, the shares of XYZ limited are currently trading at Rs 400 per share and you expect that the prices for this share will easily surpass 500 levels by next month. So, in such a case you would purchase a Rs 400 call option today, which will entitle you to purchase the shares at this price before the contract expiry. Afterwards you can sell it for Rs 500 and make profits. Buying an option requires you to pay a certain price known as the option premium.
Stock Warrants vs Stock Options – Key Differences
The major difference between stock warrant and stock options is that unlike options, stock warrants are issued by the company itself. Also, whenever a warrant is exercised, the company usually issues new shares. Warrants are issued mainly for the purpose of raising capital by offering stocks. Warrants are considered to be a source of future capital for the company.
However, in case of options, the company does not make any money from the transactions. Also, options contracts are listed and traded on the exchange and are not directly issued by the company.
Conclusion
Warrants are considered to be a long-term investment option given the fact that they come with a maximum validity of 15 years. Options on the other hand do not have such long expiry periods and are better recommended for short-term investors. Trading in warrants and options require detailed analysis and research. You can get research-based recommendations from a registered investment advisor and enhance your trading experience.
Happy Investing!
