When companies issue securities, investors don’t always jump at the chance to buy them. Because companies issue securities to raise capital, they want people to invest, and so they’ll include warrants for added incentive.
A warrant is a security that gives the holder the right to buy a certain number of securities (typically the issuer’s common stock) at a specific price (known as the exercise price) and before a certain time. Most warrants are attached to newly issued bonds or preferred stock. For example, if Company X issues $50 million in bonds with warrants attached, for every $1,000 in bond face value, the holder might receive a warrant to purchase 50 shares of Company X’s stock at a predetermined price per share over the course of 10 years. A warrant is similar to an option in that it gives the holder the right to purchase securities without obligating the holder to do so.
A detachable warrant is a warrant that can be sold separately from the security it was initially attached to. An investor who owns bonds with attached warrants can sell those warrants separately while retaining the actual bonds. Along these lines, that same investor could sell the bonds while holding onto the warrants. Detachable warrants offer more flexibility than non-detachable warrants, and as such, they’re typically more likely to attract investors.
A non-detachable warrant is a warrant that cannot be separated from the security it’s attached to. An investor who owns bonds with non-detachable warrants cannot sell the warrants without selling the bonds, and vice versa. If someone owns bonds with non-detachable warrants and sells those bonds, the associated warrants get transferred to the new bondholder automatically.
Investing in warrants
Investing in warrants could be quite profitable under the right circumstances — particularly, if the issuing company’s stock price exceeds the cost of the warrant plus the exercise price at some point in the future. For some investors, however, the appeal of warrants is limited. Investors who hold warrants do not receive any voting rights in the issuing company, nor are they eligible to receive dividends. For this reason, those who own shares of preferred stock with detachable warrants often opt to detach, or sell, those warrants so that they can start collecting their dividend payments.
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