Warrants are securities issued by a company which give their owners the right to purchase shares in the company at a specific price at a future date. The warrants are tradable in their own right, and their value will go up and down as the price of the shares to which they relate goes up and down.
Warrants have no right to dividends and no voting rights, so their value is tied entirely to the relationship between their exercise price and the share price of the company. If the share price is below the exercise price, the warrants are said to be 'out of the money' and they are worthless. If the share price rises above the exercise price, they are 'in the money' and worth something.
A warrant, like an option, gives the holder the right but not the obligation to buy an underlying security at a certain price, quantity and future time. However, unlike an option, an instrument of the stock exchange, a warrant is issued by a company. The security represented in the warrant (usually share equity) is delivered by the issuing company instead of an investor holding the shares.
Companies will often include warrants as part of a new-issue offering to entice investors into buying the new security. A warrant can also increase a shareholder's confidence in a stock, if the underlying value of the security actually does increase overtime.
Warrant certificates have stated particulars regarding the investment tool they represent. All warrants have a specified expiry date, the last day the rights of a warrant can be executed. Warrants are classified by their exercise style: an American warrant, for instance, can be exercised anytime before or on the stated expiry date, and a European warrant, on the other hand, can be carried out only on the day of expiration.
The underlying instrument the warrant represents is also stated on warrant certificates. A warrant typically corresponds to a specific number of shares, but it can also represent a commodity, index or a currency.
The conversion ratio is the number of warrants needed in order to buy (or sell) one investment tool. Therefore, if the conversion ratio to buy stock XYZ is 3:1, this means that the holder needs three warrants in order to purchase one share. Usually, if the conversion ratio is high, the price of the share will be low, and vice versa. (In the case of an index warrant, an index multiplier would be stated instead. This figure would be used to determine the amount payable to the holder upon the exercise date.)
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